Crippling, investment choking and punitive. Those are a few of the unfriendly words opponents of Proposition 1 are using to describe how the progressivity feature of ACES was hurting Alaska. It’s one of their prime talking points when encouraging the public to vote against the measure that would repeal SB21, the tax law passed last year. But if ACES was really flawed, it doesn’t mean the so-called More Alaska Production Act is good for Alaska.
“Progressivity, the central part of Alaska’s current tax system (ACES), remains the single biggest roadblock to investment and new production,” Gov. Sean Parnell wrote last year during the debate over SB21. But the fact is the progressive tax structure wasn’t a concern of his when he began pushing for oil tax reform a few years earlier. The first legislation he proposed retained it. HB 110 just changed the formulas.
ACES had a 25 percent base rate on net profits up to $30 per barrel on all production. A progressive surcharge of 0.4 percent kicked in between $30 and $92.50, then climbed 0.1 percent above that up to a maximum of 50 percent. In comparison, HB 110 proposed lowering the base rate on new production only to 15 percent and capping the maximum surcharge at 25 percent.
SB 21 has a flat tax of 35 percent on all oil production profits, although it includes a sliding scale credit for production from existing fields. That starts at $8 per barrel and zeroes out when oil prices reach $150 per barrel. It’s a progressive tax by another name that’s intended to bring into the state coffers a small portion of the windfall from higher oil prices.
Progressivity wasn’t unique to ACES. It’s something most of us deal with every year when filing our federal income tax return. And if we look at how frequently the tax brackets have been changed during the past century we’ll immediately recognize it’s a subject under constant debate.
There were seven brackets capped at 7 percent starting in 1913. By 1917 there were 21. In 1918, the top rate reached 77 percent for taxable income over $1 million, which adjusted for inflation would be about $15 million today. Not long after that the cap was lowered to 25 percent for income over $100,000 ($1.3 million today). It was raised again during the Great Depression and peaked at 94 percent during World War II.
Between 1965 and 1983 there were 25 brackets topping out at 70 percent. President Ronald Reagan simplified the tax code by eliminating all but two (15 and 28 percent). Today we’ve got seven ranging from 10 to 39.6 percent.
How all those changes affected the economy will be forever disputed. One might conclude that the rate cuts in the 1920s created an inequality of wealth that helped set off the Great Depression. Similarly, one could argue that the wealth gap today stems from the Reagan and Bush tax cuts which enabled the great recession of 2008. But it’s never that simple because tax rates alone don’t determine tax liability. There are all sorts of credits, deductions and loopholes that have to be considered. And those are forever in flux too.
The only thing we can be sure of is that we’d all like to keep more of our hard-earned income. But we should ask ourselves how we’d respond to a cut in our federal income taxes. Would we pay off some bills, invest in our home or business or even donate more to a local charitable organization? Or would we spend it outside Alaska, add to our Wall Street portfolio or tuck away for the benefactors of our estate?
Then we should wonder what the oil companies will do (when oil prices spike) with the effective tax cuts from SB 21. Because it’s their choice to reinvest here or somewhere like North Dakota, or to even reward their CEOs and stock holders with most of it.
Proposition 1 isn’t about dumping SB 21 to bring ACES back. Rather, Alaskans need to put our governor and Legislature back to work to craft a better law. Because in the final analysis the oil companies shouldn’t be allowed to keep almost the entire windfall when the price of oil skyrockets like it did in 2008. They may be doing the work to get the oil down the pipeline, but it’s still our oil.
• Moniak is a Juneau resident.