Legislative expert warns of oil tax flaws

Says higher tax rates at high prices limit profits, deter investment

Posted: Thursday, February 10, 2011

Alaskans’ oil taxes aren’t competitive and need to be lowered, an expert hired by the Legislature told the House Resources Committee Wednesday.

And to do the state the most good, they need to be lowered in a specific way, to enable the state’s oil producers to reap the benefits of high oil prices, Roger Marks told the lawmakers.

Marks endorsed a proposal from Gov. Sean Parnell to cut oil taxes which he says will make Alaska more competitive in obtaining oil company investment.

“I believe Alaskans should be very concerned with how they compete,” he said.

Marks, a former state oil and gas expert, said the tax’s progressivity, under which the tax rate increases as oil prices rise, is limiting profits and discouraging companies from investing in Alaska and producing more oil.

“It may not be 100 percent of the cause, but I believe it is a major contributing factor,” he said.

It’s one of the reasons that only three exploration wells were drilled in Alaska in the last year, the fewest since 1988 when oil prices were $8 a barrel, he said.

Marks is with the firm Logsdon & Associates, which has a $250,000 contract with the Legislative Budget & Audit Committee to analyze oil and gas issues.

Under the Alaska’s Clear and Equitable Share oil tax law, oil tax rates go up by 0.4 percent per dollar of the oil’s wellhead value, above a certain amount.

The oil tax it replaced, the Petroleum Profits Tax, also included progressivity, and was similarly flawed, Marks said.

Despite rising oil prices, production in Alaska is declining more than expected, he said.

That’s likely because oil companies don’t see the profit potential from drilling for new oil in Alaska.

“One way to fix this is to fix the progressivity structure,” he said.

One problem: Unlike the U.S. income tax, where higher tax rates are only on higher amounts of pay, when Alaska’s progressivity goes up it applies to each dollar earned, he said.

That’s different than the other areas in which Alaska is competing for investment.

“I’ve not encountered any progressivity structure anywhere in the world that works like it does under PPT or ACES,” Marks said.

Marks found at least some skepticism on the committee.

Rep. Paul Seaton, R-Homer, asked what the oil producers did to earn the higher profits at high oil prices, and in what ways could a lower tax rate provide an incentive for more investment.

Marks acknowledged that the companies didn’t do anything to create the additional profits, but that when they make investment decisions they want to be able to benefit if prices shoot up.

“Even under ACES the producers are making a lot of money now,” he said. “The question is, how much more can they make somewhere else.”

He warned that capital was very fluid, and could go easily, to, for example, to any of the 30 countries in which ConocoPhillips has operations.

“Where are they going to get the most for the money?” Marks asked. “That’s why I believe that international competitiveness is the key.”

Earlier in the day, however, Rep. Les Gara and Sen. Hollis French, both Anchorage Democrats, held a press conference to highlight all the drilling and investment incentives that are part of the oil tax law and which make Alaska more competitive.

“We want to make sure that as we discuss the investment climate in Alaska, we remember that there are powerful incentives for companies to come here and do business in the form of royalty relief and investment tax credits,” French said. “And the proof that those are working are in the profits.”

Marks said the various tax credits were fine.

“I think the credit system you have in the current law is very strong,” he said.

“I would not focus on the credits. The high tax rates are dwarfing anything the credits do,” Marks said.

• Contact reporter Pat Forgey at 523-2250 or patrick.forgey@juneauempire.com.

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