Like “Fiscal Cliff” and “Sequestration,” the reference to “Oil Tax Reform” is shaping up to have an effect on the masses of turning a deaf ear to the rhetoric — and for others it’s raising many layers of ire. The prospect that truly meaningful change will come out of disengagement or misplaced anger puts success in doubt.
The current tax structure, while having successfully filled state coffers in recent years, has not encouraged the new oil production we need. In a complex system of assessments, incentives and taxation, there are circumstances where the producer is actually penalized for more production. The unintended consequence of having made this grievous miscalculation in ACES is the tremendous impact this will have on Alaska’s financial future.
Making a dangerous assumption that Alaskan oil prices will remain relatively constant for the next five years, oil production declines of 4 percent a year will result in a loss of 20 percent of the state’s revenues in this same time period. This is on the order of about $3 billion less per year in state income at the 5-year mark. We are already seeing the impact of production declines in the fiscal calculations for the next budget year and that raises the prospect that we’ll be forced to cut expenditures significantly or dip into the state’s reserves. It doesn’t get any more real, folks… and this should serve as a wake-up call to doubters in the Legislature.
If the oil producers were to make the decision today to undertake more oil production, the estimates put any meaningful increase in throughput at five or more years out. This means we’ll have 20 percent less revenue at the time production stabilizes or starts to climb. If the Legislature chooses to punt this issue into the next session, or worse yet chooses to enact benign changes to the plan, we Alaskans will suffer an even lengthier stretch of difficult financial times... long after we come to our senses.
We have the reserves to get us through five years of lean times if we make a good decision today. We do not have the reserves to endlessly fund state government without an increase in oil production.
The debate seems to have gotten bogged down in three areas: the “oil producers make too much money already,” “ACES works just fine” and “its our oil.” None of these are relevant but they make for great bumper stickers. They most certainly don’t help fill our lifeline. What matters is that production investments be returned to Alaska. The rest are all distractions that draw our attention away from what should be this singular focus… more oil.
Neither ACES, nor its predecessors have been successful at increasing throughput. The clock is ticking. Whether or not tax reform is made this session, the next few years are going to be tough on Alaska. Of this there is no doubt.
Alaskan legislators: Have the courage to stand together and shape our future. We can choose to help ourselves out of the hole we largely created, or we can ride our fancy little slogans into a state of despair.