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Reducing oil taxes - that can be compared to car-buying strategies

Would you pay in advance in exchange for a promise from the salesman that he will give you your car years in the future, or maybe not - since there are many uncertainties?

Posted: March 27, 2012 - 12:08am

The Alaska Senate is struggling mightily to draft revisions to “Alaska’s Clear and Equitable Share” (ACES) oil tax law in response to heavy pressure from the governor, many other Republicans in the Legislature, and oil industry executives, all of whom are demanding a very large reduction of oil taxes. The Senate is attempting to do this without giving away the farm (or rather, the state), but they are facing major difficulties. In part, this is because pipeline flow data provide no evidence that lower taxes are correlated with higher production. It is also, in part, because the governor and Legislature are attempting to solve this problem backwards.

Their approach can be characterized as backwards because Alaska’s stated goal is to increase oil production, primarily from the North Slope, thereby also increasing the flow of southbound oil through the Trans-Alaska Pipeline System (TAPS), and also because oil taxation is retrospective. That is, oil is taxed after it has been produced, not before. The proposed revisions to ACES considered to date, however, will have the effect of granting the oil industry lower taxes in advance of increased production (if any), even though whether increased production has been attained will be known prior to when taxes are levied.

The potential outcomes of this approach, which seem likely to fall somewhere between undesirable and disastrous, can be mitigated and perhaps even eliminated, I suggest, by adopting instead what might be called a forward approach in which any revisions of the present ACES tax law would lower tax rates only after production above and beyond a baseline level has been measured. This would meet Alaska’s goal of encouraging increased oil production accompanied by increased annual TAPS throughput while avoiding a priori commitments by the Legislature to huge and potentially-ruinous revenue reductions.

Baseline production for each producer could, for instance, be the total produced by that corporation during the year prior to passage of the ACES revision (say, during 2011). If taxes are levied each month, whether oil produced by a given corporation is subject to reduced taxes could be determined from metering of the pipeline(s) of that producer that contribute to total TAPS throughput. When or if the oil from given producers exceeds their baseline production, their tax rate could be lowered in proportion to the production increase and a tax credit could be granted for oil produced earlier in the year. This should be feasible because pipeline metering would yield both the prior-year production, whether the current-year production has exceeded that, and if so by how much. If production by a given corporation does not exceed its baseline level, the current ACES tax rate, I suggest, should remain applicable.

Alaska and the oil industry could both benefit from a dynamic tax structure of this nature because individual oil corporations would be taxed at a lower rate in proportion to how much oil they produce above and beyond their baseline level, while Alaska would benefit because the Legislature would not have to commit to ruinous revenue reductions while optimistically assuming they might be counteracted, eventually, if hypothetical increases in oil production occur sometime in the future.

An ACES revision of this nature, should it be enacted, would put oil tax reductions on a basis somewhat analogous to standard practice for buying a new car. That is, you make your payments while you’re in possession and driving it around. No one would agree to make payments on a new car in advance in exchange for a promise from the salesman that he’ll deliver it years in the future, while admitting maybe he won’t since there are many production and delivery uncertainties. Yet the latter, in essence, is what our governor and Legislators will be doing if they enact an oil tax reduction without specifying that reduced taxes will be levied only in proportion to increased production beyond a baseline level after (not before) it occurs.

• Lingle is a research professor emeritus at the Geophysical Institute, University of Alaska Fairbanks. His doctorate is in geophysics.

Would you pay in advance in exchange for a promise from thesalesman that he will give you your car years in the future, or maybe not since there are so many uncertanties?
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