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Alaska in better shape thanks to oil tax reform

Posted: January 22, 2014 - 1:00am

A state that depends on oil revenues for 92 percent of its general fund cannot lose 200,000 barrels of production each day without facing economic ruin.

While every other oil province has prospered during this era of high oil prices, our failed oil tax policy known as ACES has delivered us billion-dollar deficits. Alaska lost out on the oil boom because our tax policy rendered us uncompetitive.

We have a new tax policy now that only rewards producers when they actually produce more oil. It’s a great step in the right direction and we must give this law time to work.

The new law raises the base tax rate from 25 to 35 percent but eliminates the crippling progressivity feature. Contrary to what oil tax reform opponents say, the combination of a higher tax rate and no progressivity actually reduces the deficit this year. Here’s why.

Alaska oil tax, whether under ACES or the new law, is a net profits-type tax. The tax rate — 25 percent under ACES, 35 percent under the new law — applies to the net value of North Slope oil. Net value is revenues (production and the price of oil) minus costs.

Here’s where the math comes in. Production under ACES has declined much faster than anyone predicted — 8 percent alone in 2013. Oil prices — which hovered near historic highs under ACES — are falling, while production costs are rising.

The progressivity formula in ACES was very aggressive. It ramped up tax rates quickly when values increased but also ramped down quickly when values dropped, as they have recently.

So the bottom line is the producers will pay a higher tax under the new law than they would have under ACES – 35 versus 34.9 percent this fiscal year and 35 versus 32.6 percent in FY 2015, according to Department of Revenue.

ACES has been a one-way street to the poor house. It’s embarrassing to point out that Alaska was the only state to suffer production loses from 2011 to 2012. Every other oil state saw their production go up, while Alaska continued a steep decline.

Fortunately, Alaskans changed course and now we are back on the road to a more stable economic future. Even though our new tax law has been in effect for only days, it’s already working.

The North Slope producers have pledged $4.5 billion in new projects, including $1.5 billion in near-term projects that will add 55,000 barrels of new production by 2018. The state says there’s enough new work under way to halve the production decline to 4 percent this year and 2 percent in 2015 and 2016.

That’s great news for our state, our business community and our children.

A healthy oil industry is essential for a healthy Alaska. Not only does oil revenue fill our general fund — so you and I don’t — it supports one-third of all jobs in Alaska.

It’s also a major contributor to our Permanent Fund, where I have had the honor of serving as a trustee for 12 years, including five as chair. Oil money first seeded the fund and oil money continues to help it grow. Each year we deposit one-fourth of our royalty share of oil into the fund. That dedicated oil stream now totals $14.5 billion, counting the $840 million for FY 2013.

Oil also represents a major investment for the fund, which holds stocks valued at $1.7 billion in 309 companies involved in the oil and gas industry.

Our new oil tax is all about increasing production, which means more jobs and opportunity for small Alaska businesses — and a healthy economy for our children.

We need to give oil tax reform time to work, which is why my family is voting “no” in August on Proposition 1.

• Carl Brady is a retired insurance executive who currently serves on the Board of Trustees of Alaska Pacific University and the Alaska Permanent Fund Corp, and is a community advisory board member for Wells Fargo Bank Alaska and the Alaskan Command Civilian Advisory Board.

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