Don’t let new state taxes sacrifice positive trends in Alaska’s energy sector

David Williams (contributed photo)

After decades of decline following its peak in the 1980s, oil production in Alaska is showing some significant signs of progress.

 

Put simply, the decline has reversed over the course of the last few years, and that is very good news for the state of Alaska.

2017 is expected to mark the third consecutive year that Alaskan oil production will increase. This is impressive and significant under any conditions, but it is particularly noteworthy in an environment defined by depressed prices and an unsteady policy landscape that finds the oil industry perpetually in the crosshairs of potentially devastating tax increases.

The oil and gas industry was far from the only victim of the oil price crash. For the state of Alaska itself, which has for decades depended almost exclusively on the state’s robust oil sector to fund its government, the extended period of low oil prices contributed — alongside excessive state government spending — to a ballooning, multi-billion-dollar budget deficit.

To some in the state Legislature, the answer to the problem was to propose a reformed tax structure that would simply make the industry pay more taxes regardless of the fact that they were making considerably less money, and operating under far tighter economic constraints and razor thin profit margins.

Experts both inside and outside the industry were quick to caution against such an approach, noting that the added tax burden would constrain investment, exploration, and ultimately production. And indeed, the concern played out even in the absence of passed legislation, with major projects delayed because of, among other things, policy uncertainty. Caelus, for instance, stepped back from a project worth billions for this very reason.

Companies in any industry need certainty to invest with confidence. It’s true of any business, large or small, whether you’re buying a food truck or building a factory. But it’s true in an industry like the oil sector, where billion-dollar bets can either generate a gusher or profits or come up completely dry.

The uncertainty spurred by the state’s ongoing quarrel over rewriting the tax code guiding the oil and gas business makes investment in Alaska less appealing, puts even more pressure on an already high-stakes business, and, ironic though it may seem, causes the state to lose economic productivity, jobs, and — yes — tax revenue.

Good economics should be enough to dissuade any lawmaker interested in the best for his state from upending the sector’s tax code. But for those that need more convincing, the third straight year of increasing production provides another telling proof point.

For one, it shows that revenue from the sector is increasing on its own volition through efficiency and market forces. Through a policy lens, another year of production growth also shows that the tax and policy structure enacted during the last major reform — SB 21 — is working.

According to the Department of Natural Resources, the industry is “doing more with less.” They’re streamlining operations, managing risk, and keeping the oil flowing more steadily. They’re learning how to operate efficiently and productively in today’s low-price environment. That’s good now, but it’s even better when prices turn around and margins increase considerably.

New oil taxes would throw this progress out the window without addressing any of the factors that actually led to the state’s deficit. Lawmakers should look at the latest production trends, recognize a positive trajectory when it is standing in front of them, and walk away from the effort to pull the rug out from under the industry.

The oil and gas industry still has a very bright future in Alaska — one that generates billions in revenue and supports countless Alaskan families. The Legislature cannot allow frustration over government spending and partisan bickering to derail the lifeblood of its economy.


• David Williams is president of the Taxpayers Protection Alliance, a nonpartisan, nonprofit organization committed to responsible government and lower taxes. He resides in Washington, D.C. My Turns and Letters to the Editor represent the view of the author, not the view of the Juneau Empire.


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