A new approach to oil taxation

This is Part 1 of 2. See Part 2 in Wednesday’s newspaper.

 

Our oil severance tax system is broken. It is failing us because it is heavily dependent on the price of crude oil. Since the mid 1970s the price of crude oil has been as volatile as any item on the commodity market. Our severance tax produced massive income a few years when crude oil prices were high. It has produced basically no income with prices low. The severance tax itself is failing us.

Instead of another remake of the existing severance tax we need to expand the present property (also called an “ad valorem”) tax. It’s the oil tax system the state of Texas has used successfully for decades.

Commercial oil was discovered in 1901 in Texas with Spindle Top, the largest oil field in the America at the time. Commercial oil in Alaska was first discovered at Katalla in 1902 but production stopped in the 1930s. The greatest oil field in America, however, was discovered in 1968 at Prudhoe Bay, less than 10 years after we became a state.

The severance tax system could have served us well enough when Alaska was young. But we never did get it right. Tom Fink proposed a cents per barrel tax for certainty but it was never adopted. The old declining Inlet fields needed different treatment from the new mammoth Prudhoe Bay. Mike Colletta sponsored ELF which worked okay initially but proved a disaster by the late 1980s. Between the mid 1980s and the early 2000s results varied. When oil prices were high, severance tax income rose. Rick Halford points out that this allowed the state to deposit additional money in to the Permanent Fund. But when oil prices dropped as they did numerous times, severance tax income dropped as well. Under Gov. Frank Murkowski we shifted to taxing gross income. Then we shifted back to net income with ACES. That lasted less than 10 years. Today credits for new discoveries and low oil prices keep the present severance tax from producing much revenue now.

In 1978, when I was Senate President, I pushed a separate accounting income tax. Traditional accounting practices do not reflect the proper distribution of income for international companies. Separate accounting does. It worked well and produced billions. Jay Hammond said repealing it was one of the two worst mistakes he made as governor. However, I am not suggesting we go back to that now. It would still work but is a hill too high for this Legislature to climb.

Crude oil prices are a roller coaster ride. Between completion of the pipeline in June 1977 and today, the price of crude oil bounced from $55 to $120 then to less than $40 in the first 20 years. Since 1998 it has bottomed at $12, roared to $158, then dropped to less than $60 two years later; then it turned and raced to $120, but then plummeted to less than $40 and now has been stuck for several years between $45 and $55. Texas gymnasts from Mary Lou Retton to Simone Biles could not duplicate all its contortions.

So much for the unpredictable, unreliable severance tax. Let’s think about something which will provide some stability and constancy but obtain Alaska’s fair share.

Enough is enough. In 1 Corinthians 13 Paul said: “When I was a child, I spoke as a child, I understood as a child, I thought as a child: but when I became a man, I put away childish things.”

Hopefully we are now a mature state.

The second article will explain how a broadened property tax would (1) provide stability, (2) produce sizeable income, (3) eliminate the need for constant revision, (4) use a tax system familiar to the oil companies are familiar with and (5) would make forward funding possible. By smoothing out state revenues it would lessen if not eliminate the feast and famine extremes of state spending. With the existing property tax on the pipeline and a small property tax on the gas, Alaska could expect $3 billion or more for the foreseeable future. We would have a steady reliable source of income to fund state government.

It’s more than 50 years since statehood. So let’s follow Paul’s advise. Now that we are mature, let’s think like adults and get off the severance tax roller coaster ride.


• Chancy Croft was a member of the Alaska Legislature from 1969 to 1978 and was president of the Senate in 1975-76. He resides in Anchorage.


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