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My Turn: Economic research shows Alaska is better off under new oil tax

Posted: May 4, 2014 - 11:03pm

For almost four decades, Alaska’s business community — including those of us at Northrim Bank — have relied on economist Scott Goldsmith for his expertise and analysis of the health of the state’s economy.

Scott is now professor emeritus at the University of Alaska Institute of Social and Economic Research (ISER), where he’s worked for the past 39 years, concentrating on the particular fiscal problems of an economy dependent upon the petroleum industry. Much of his work has appeared in the Fiscal Policy Paper series published by ISER since 1992.

We at Northrim consider the work Scott and ISER do so important we have donated more than $1 million over the last 15 years to help fund it. But that doesn’t mean we get to direct it — or even have a voice in the findings. That’s up to Scott and the other ISER economists.

Sometimes the news Scott delivers is not so good — like the years of work he’s done on the approaching fiscal cliff. But his latest research is great news for everyone who lives in Alaska.

In an analysis called “Sense and Nonsense,” Scott compares the new oil tax reform enacted by SB 21 to ACES, the old tax. Under ACES, Alaska lost more than 200,000 barrels of oil production/day. But a measure to repeal SB 21, and return to ACES, is on the August 19 primary ballot.

Scott comes to four major conclusions in his analysis:

• There is no $2 billion “giveaway.”

“About 4 percent of the $2.1 billion drop in the fall oil revenue forecast for 2014 is due to the new tax. Most of the decline can be traced to lower price and production assumptions — as well as higher cost assumptions — in the forecast, and the effects of those changes on the tax rate. The rest of the decline is a one-time drop, with oil producers claiming credits expiring with the old tax,” he writes.

• Alaska should collect more revenue under oil tax reform.

“Future revenues are very sensitive to oil prices and costs of production and are difficult to forecast. If current trends continue — if costs continue to rise faster than oil prices — the new tax could produce more revenue. But if conditions revert to those of past years, when production costs were lower, relative to oil prices, the old tax could produce more revenue. Among the factors contributing to rising production costs in recent years have been inflation in the price of inputs, maintenance of aging facilities, and development of marginal fields.”

• More investment means more revenues

“The tax change, combined with a modest increase in new production, would produce higher revenues under a reasonable range of assumptions about oil prices and production costs. New investment would drive up tax deductible costs in the short run — reducing production taxes — but that loss would be more than offset in later years by additional production tax and royalty revenues from new production, even at a lower average tax rate.”

• Investing new money into the oil patch creates long-lasting jobs and increased consumer purchasing power.

“Investments that draw new outside money into the oil patch could create long-lasting jobs and increase consumer purchasing power. For example, $4 billion in new spending in the oil patch could add an average of 5,000 public and private sector jobs per year over 20 years, with more than $300 million of additional wages and salaries annually,” he wrote.

Scott’s analysis is posted on the ISER website and I encourage all Alaskans to read it.

Ballot Measure 1 is one of the most important issues this state has faced in decades. We can’t control world oil prices, but we are in charge of our tax policy. As both Democrats and Republicans acknowledged, ACES took too much of the profit at high oil prices and left Alaska too exposed at lower oil prices.

Oil tax reform made Alaska more competitive, which has already led to more investment and new production that will help stem the current decline.

That‘s why a vote “No” is the right vote on August 19.

• Marc Langland is chairman, president and chief executive officer of Northrim BanCorp Inc., and is chairman and chief executive of its wholly owned subsidiary, Northrim Bank. Alaska Pacific Bank officially merged into Northrim on April 1.

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Karl Ashenbrenner
Karl Ashenbrenner 05/05/14 - 06:42 am
i wonder

how much of his salary is being paid by the over 8 million that is being pumped into the No effort by the oil companies. And as CEO I would assume he has an MBA and would know that investment does not automatically mean increased revenue especially in MAPA where the write offs are unbelievably generous. As far as being more competitive that is a complete fallacy spouted by oil shills incessantly. With the PER BARREL PROFIT under ACES being 2.5 times what it is in the lower 48 and higher than anywhere else in the world how can anyone think that we were not competitive? What we are now and what he should said is that we are now a WHOLLY OWNED SUBSIDIARY of the oil companies.

Haily George
Haily George 05/05/14 - 08:54 am
what do banks have to lose ?

what do banks have to lose the public bails them out either way.

And how does climate change factor into the stress test for an economy based on oil?
I find it astonishing that after 39 years there is no mention of that elephant in the research. With oil soon to become obsolete who will bail our state out with 2 billion?
CEO's will all have gotten their bonuses but what will the public be left with? Another recession.

Art Petersen
Art Petersen 05/16/14 - 11:53 am
More "trickle-down economics"

The way this Northrim banker leans on Prof. Goldsmith, you'd think he's as established and substantial as the Rock of Gibraltar. That's understandable because he's saying, and been saying (generally), exactly what those in support of SB21 want to hear. The professor is a "supply-sider," a retired UAA economist who for years has been strongly in support of big businesses in Alaska and beyond. "Supply side" economics supports the position that for business to flourish, the ability to produce goods and services should not be hampered by regulation, have very small taxes (if any), and pay royalties at the lowest rate possible. In such an environment (the thinking goes) business is motivated to do its best by the prospect of fantastically huge profits. As for "the people," they get what "trickles down": long term business stability that maintains jobs and produces smallish but steady revenues for state budgets.

What trickle-down economics also produce, though, is a population of serfs with declining infrastructure, struggling schools, and other resources put at risk. No surprise, then, that this economist recommends proceeding with the Pebble Mine. For him, putting a huge mine that is environmentally dangerous at the headwaters of a magnificent fishery is worth the risk.

Although a long-time supply sider, however, this economist is conditional, not absolutist. In his findings, he uses conditional words to describe the economic future he sees, not the certainty of "is" or "will be" but nebulous language such as "assumptions ... suggest" what "could" be the case; and "predictions are difficult to forecast; and "would produce higher revenues under a reasonable range of assumptions"; and "could create long-lasting jobs and increase consumer purchasing power." From these not unreasonable interpretations, the banker shapes what he wants the message to be with his introductory bullet points: •There is no $2 billion “giveaway.” "•Alaska should collect more revenue under oil tax reform." "•More investment means more revenues" "•Investing new money into the oil patch creates long-lasting jobs and increased consumer purchasing power," with this last leaving out the important word "could"--meaning also "might not." Left out entirely is that SB21 requires nothing of the oil industry.

It's an old saying that numbers can be made to mean whatever you want. Despite all the words, such as SB21 is not a "giveaway," it nevertheless is just that.The state department of revenue projected that SB21 in the first year would reduce income from Alaska's oil by $2.1 billion, and right on schedule, Alaska's deficit this year is about $2 billion. Professor Goldsmith himself has said that Alaska is burning through its savings at an alarming rate. Alaskans should not have to settle for "trickle down" small change while big resource businesses bulldoze the big dollars off the top into their treasuries. That's unjust. It's also bad business for the people of a big resource state like Alaska that relies so heavily on the income from those resources. There's nothing wrong with that. It's even enshrined in Alaska's Constitution (Article VIII, Section 2):

The legislature shall provide for the utilization, development, and conservation of all natural resources belonging to the State ... for the maximum benefit of its people.

The banker makes the point that both political sides believe ACES needs adjusting. True. One side, though, squeaked through SB21, an inequitable adjustment that favors the oil industry while the other side has an equitable adjustment ready and waiting. It favors the people of Alaska AND the oil industry--both equitably. That‘s why a vote “Yes” to repeal SB21 is the right vote on August 19.

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