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The Governor's oil tax cut plan will damage Alaska's economy

Posted: January 14, 2013 - 1:00am

Last year the Governor pushed a $2 billion oil revenue giveaway in the form of tax breaks that didn’t require new Alaska investment. There’s a smarter way to do oil reform, rewarding work leading to new production to earn reasonable tax breaks.

The Governor’s $2 billion in oil tax reductions could, under the bill’s language, be spent outside, in places like Iraq or Russia. From statements by the Governor’s Revenue Commissioner, tax reductions that don’t require Alaska investment will be a major part of his 2013 legislation. It’s starting to look like the new bill will be a lot like the old bill.

We can do better than lipstick on a pig. I hope the Governor will reconsider.

Losing $2 billion in oil revenue — to be spent by oil companies outside — will jeopardize the more than $15 billion in savings our current tax law has built. It will result in economic disaster through cuts to road construction; more teacher layoffs, law enforcement and firefighter layoffs, and increased unemployment.

The smarter way to do oil reform, which I and others filed legislation on last year, allows reasonable tax breaks if companies invest in activities aimed at new Alaska oil production. We’ll listen to make our ideas better. But we won’t support a massive corporate giveaway.

We should grant companies increased tax credits to help them build needed “processing facilities” when they find new oil. Reasonable tax reductions for companies that are willing to put new Alaska oil into the pipeline make sense.

We want companies to increase production in Prudhoe Bay, Kuparuk and the large reserves of heavy oil in those fields. We should grant tax credits on that portion of investment in new wells and drilling that exceed what they’ve spent in the past.

The Governor’s approach of lower taxes, with no Alaska investment requirements, has been tried, and has failed in the past.

Until 2006 we had a near 0 percent Production tax on 15 of 19 North Slope fields, and all new fields that weren’t massive. What happened? Well, while oil prices rose from $20/barrel to nearly $60/barrel in that time, production declined 5 – 8 percent a year, worse than today. Just giving away money doesn’t work.

And don’t be misled by suggestions current law is “oppressive” to our major oil companies. Conoco has earned an average of roughly $2 billion/yr. in Alaska oil profits. Exxon and BP don’t reveal their Alaska profits but Exxon has testified their profits are similar to Conoco’s. And employment and capital investment on the North Slope are 40 percent higher today than in 2006 because today companies can only reduce their tax payments by investing in Alaska — credits we can improve upon.

We also have more new oil exploration than in a decade, and a new Conoco development in NPR-A starting now. And we’ve passed a law that requires tax reductions if a company proves it needs tax breaks to make new oil fields economic. That’s a smart system.

Finally, let’s also not ignore the truth about another failure in the Governor’s approach. Here is Exxon and BP’s House Finance Committee testimony when asked if his bill would lead to new field exploration — which we need in addition to oil from existing fields:

Rep. Gara: “...why should we believe that reducing taxes is going to cause you all of a sudden to do your first exploration well since 1992?”

Dale Pittman, Exxon Production Manager: “...I can’t promise you it would lead to increased exploration.”

. . . .

Rep. Gara: “...BP doesn’t do what was referred to as traditional exploratory wells...?”

Claire Fitzpatrick, BP Alaska Development CFO: “If your question was are we intending to do more exploration, it is not in my current plan.”

Conoco said nothing different.

With partisan redistricting in 2012, the Governor got the Republican-dominated Legislature he hoped would pass his bill. Hopefully legislators will realize that $2 billion in non-targeted tax reductions will damage our economy, and not produce the oil Alaska needs to fuel this and the next generation.

• Gara is an Anchorage Democrat who has been active on oil and gas issues.

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