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My Turn: Tax reform must focus on increasing Alaska's economy

Posted: January 13, 2013 - 12:06am

Oil production is the cornerstone of Alaska’s economic foundation and an engine of opportunity for Alaskans. As Commissioners of the Departments of Natural Resources and Revenue, we are charged with managing Alaska’s resources, finances and oil wealth for the maximum benefit of current and future Alaskans.

When it comes to reforming Alaska’s oil tax system, we are guided by Alaska’s Constitution and directed by Gov. Sean Parnell’s guiding principles, which he has recently underscored: Oil taxes must be fair to Alaskans, must encourage new production, must be simple so they restore balance to the system, and must be durable for the long term.

With these core principles in mind, our departments have extensively reviewed the current oil and gas tax system – taking into account the analysis we received from a broad range of experts.

Alaska is blessed with world-class resources on the North Slope. We have billions of barrels of conventional resources that remain undiscovered, and billions more in unconventional resources that can sustain our economy for generations.

Unfortunately, we are not the only resource opportunity available. There is great competition for investment dollars to develop resources around the globe, and while oil provinces are booming in North America and elsewhere, Alaska has been needlessly losing out.

As we look toward new oil development in Alaska, we see that the current system creates a dilemma for the State. Since the State receives oil tax revenue from production, but awards tax credits based on a company’s spending, we incur significant costs to the treasury as projects are developed.

Basically, the more companies spend, the more taxpayers must foot the bill. It seems counterintuitive, but in the near-term, significant new developments could lead to budget deficits depending on the price of oil.

Under current law, in the next fiscal year, the state will pay out more than $1 billion in credits to either reduce a tax liability or to directly pay companies that are not producing oil. These payments negate two-thirds of the $1.54 billion the state will receive through the current oil and gas production tax’s “progressivity” rate.

Meanwhile, companies that commit to producing new oil reserves in Alaska can expect to make a little more than $4 per barrel. At the same time, they can go to our competitors and make $7 to $9 per barrel.

This is a key reason Alaska is considered to be in extreme harvest mode. We are not seeing the investment and development activity that we need to produce greater volumes of oil and greater economic opportunity. The International Energy Administration recently predicted the United States will be the world’s largest oil producer by 2020. Alaska should be leading this domestic energy production boom, given its world-class hydrocarbon basin, but instead we are falling behind North Dakota, Texas, and soon, California.

Clearly, our complex tax system and uncompetitive tax rate is a major disincentive. The portion of the tax rate called “progressivity” is calculated monthly and varies significantly, making it difficult for any company to plan around or predict. Progressivity is primarily based on the price of oil. If oil prices drop, the revenue from progressivity declines but the taxpayer bill for credits remains the same. We can foresee a potential scenario, under our current fiscal system, where we seriously deplete the State treasury in the near term, while maintaining our downward production spiral.

These elements of our current tax system create an imbalance that exposes the State to excessive financial risks. Our current system rewards private spending rather than new production.

Does that mean that we should give up on exploration tax incentives? No. But we must restore balance — reducing the risks to our treasury and refocusing on effective incentives that secure new production.

We also must enact tax reform that focuses on growing oil production, economic activity and jobs.

With targeted reforms to the current system based on identified problems, we are confident that Alaska can increase its revenue stream and revitalize our oil and gas industry to create lasting opportunity for generations to come.

• Butcher is the Commissioner for the Department of Revenue. Sullivan is the Commissioner for the Department of Natural Resources

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