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Ensure stability - study oil tax reduction carefully

Posted: March 13, 2013 - 12:01am

Recently I’ve been quoted in the media urging the Senate to tap the brakes on SB 21, the governor’s oil tax reduction bill. I firmly believe that a more deliberate and calculated approach is needed in order to strike the right balance in our oil tax structure and I’ll explain why. The people of Alaska own a world-class oil basin on the North Slope.

The revenue generated from our legacy fields, namely Prudhoe and Kuparuk, provides funding for 90 percent of our state services. The mechanics of that tax system and the level of government take derived from it are front and center in the oil tax debate. It is a one-time payment for the removal of the people’s resource.

According to the Department of Revenue’s fiscal note for SB 21, which describes the fiscal impact to the state, the passage of this bill will reduce the state’s revenue received from oil production by an average of $750 million per year through 2019. At the same time we debate how much less the state should charge the oil industry to extract our resources; the Legislature is beginning a multi-year reduction in the state’s operating and capital budgets.

The current version of SB 21 as amended by the Senate Resources Committee sets the government take (the total tax collected by the state and federal government) in the legacy fields at 63-65 percent. Last year, the Senate received testimony from our consultants that a 70-75 percent government take in the legacy fields is reasonable, though maybe slightly high, compared to other petroleum producing regimes.

Under ACES, the government take at current oil prices is around 70 percent. As the price of oil increases, the percentage of government take also increases as a result of the progressivity calculation built into the tax code. At higher oil prices, I agree the splitting of profit cash is too heavily weighted on the side of the state. This puts the state in a competitive disadvantage to many other oil basins.

I applaud the governor and the Senate for finally focusing their efforts on fixing the structural flaws in ACES. I’m encouraged to see that SB 21 addresses the problem of the tax credits in ACES which are too generous and at certain oil prices can result in the state paying out more in credits than it receives in tax. That’s absurd. The bill also eliminates progressivity which I believe is a mistake.

As I mentioned earlier, the current rate of progressivity is too high at higher oil prices and I believe it should be modified, but not eliminated. Without some level of progressivity, we will have a regressive tax regime which means the share of profits to the state decreases as the price of oil increases. That’s unacceptable for any sovereign that has a fiduciary responsibility to the people who own the resource.

A fair splitting of the resource wealth between the owners, you, and the oil industry along with tax stability and predictability is the primary goal and objective that must be achieved in any bill that passes. If these goals and objectives are not achieved the industry will not have a tax regime stable enough to predict and model with confidence. We will continue to, yet again, change the tax environment.

It is foolish for the state to relinquish hundreds of millions of dollars per year from already profitable and economic legacy fields where the tax structure is not broken. To do that while simultaneously telling the people who own the oil to tighten their belts because the state is going to run unnecessarily high deficits will be a hard pill for the public to swallow. Rushing any significant oil tax reduction bill through the Legislature without a thorough understanding of its impacts will result in a lack of public support for the ensuing budget cuts and an unstable tax regime for the oil industry to operate under.

• Stedman represents Senate District Q in the Alaska State Legislature.

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