Oil tax plan questioned

Legislators try to determine tax rate to keep revenue and production high

Posted: Sunday, March 05, 2006

The Alaska Department of Revenue on Friday addressed a list of 72 questions that lawmakers pitched to the administration on blurry areas of the governor's proposal to create a new oil and gas tax system based on producer's net profits.

Legislators are stumped on determining a tax rate that would earn more money while oil prices are high and a tax credit that would encourage producers to go after oil reserves on leases that are more expensive to develop.

Members of the House and Senate Resources committees wanted to see how much the state may collect if they set the tax rate between 20 and 30 percent, coupled with tax credits.

The most the state can earn on oil over the next 24 years is a total of $21 billion, assuming the average price of oil stays at $60 a barrel and the Legislature sets the tax rate at 30 percent with a 15 percent tax credit on expenses for exploration and development.

Depending on the price of oil, the state would bring in $1.2 billion and $16.7 billion at a rate of 25 percent with a 20 percent tax credit, and between $550,000 to $13 million with a tax rate of 20 percent and a 20 percent tax credit.

Scenarios did not include revenue gained from a possible natural gas pipeline.

Oil producers operating in Alaska told legislators last week that a higher tax rate would hurt chances for oil exploration and end their business in the state prematurely.

Under the current system, producers pay various rates depending on where they drill. The new tax system could quadruple the tax rate for some producers. Oil companies said they endorse the governor's suggested rate of 20 percent, but were against anything higher.

Democrats said they want a 30 percent rate.

"If we are too aggressive we will get a steeper decline (of revenue)," in the long run, said House Resources Co-Chair Jay Ramras, R-Fairbanks. "The value for the state of Alaska is to add years of productivity to our hydrocarbon fields and not pick the fruit too early and too aggressively."

Rep. Harry Crawford, D-Anchorage, said the administration was just talking about suppositions.

"There's no way in the world they can project out more than five or so years," said Crawford. "Obviously, they're trying to make the best case they can with the governor's numbers."

With oil prices at an average of $40 or $60 per barrel, the state fared better with the net profits tax system through 2030, according to the department. But at $20 a barrel, the state would no longer collect taxes as early as 2015.

In that low price scenario, the current production tax system known as the economic limit factor, or ELF, would keep the revenue flow alive through 2030.

"That's an illustration of the luxury economists have and the responsibility legislators have," Ramras said.

Legislators also wanted to know how much they would pay producers if they include a "look back" clause in the bill that reimburses producers for investing in long-term infrastructure over the past five years. The department said that total was $5 billion.

Lawmakers are also tasked with deciding whether to make the bill effective in July or from January. Depending on the tax rate, the loss of revenue would be between $480 million and $770 million if the new tax system starts in July.

From a legal standpoint, the state would probably be able to make the effective date retroactive, said Robynn Wilson, of the department.

• Andrew Petty can be reached at andrew.petty@juneauempire.com.



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