Analysis: Is Parnell's oil tax plan right way to go?

Posted: Sunday, March 06, 2011

JUNEAU — Gov. Sean Parnell wants Alaskans to take a leap of faith.

MICHAEL PENN / Michael Penn
MICHAEL PENN / Michael Penn

He wants them to believe his plan to cut oil production taxes — potentially costing the state up to $2 billion a year or more in revenue — will pay dividends down the road. The belief is that fewer taxes will prompt oil companies to invest in more development, create tens of thousands of new jobs and boost production.

It very well might. It also might not.

“Nobody knows,” said Matthew Berman, a professor of economics at the University of Alaska Anchorage’s Institute of Social and Economic Research.

“It’s not clear that cutting taxes will change the investment picture that much,” he said. “It’s not going to hurt. But will we get the money back in the longterm? It’s impossible to say, I think.”

With so many variables at play, Revenue Commissioner Bryan Butcher wouldn’t hazard a guess during a recent House Resources Committee hearing at when Alaska might break even on the lost revenue.

“It would certainly be a number of years,” he said, adding later that the state might be pleasantly surprised, or not.

In a report released in January, right after Parnell proposed overhauling the tax structure, the Revenue Department said repeated changes to the tax over the past few years made it difficult to tell whether the current regime — known as Alaska’s Clear and Equitable Share — is helping or hurting industry.

Over three weeks of hearings in the resources committee, the administration couldn’t provide evidence the tax cut and expanded credits Parnell is proposing would create more jobs. Oil companies wouldn’t guarantee they’d invest more in the state but praised the plan as a positive step toward making Alaska a more inviting place to business; they haven’t gone into great detail publicly on what else they’d like to see happen.

And it remained unclear, due to a lag in auditing, whether hundreds of millions of dollars in tax credits were going toward new development — as many lawmakers had hoped they would — or toward maintenance.

Minority House Democrats see all this as a huge red flag, arguing the state doesn’t have the information it needs to make an informed decision. Rep. Beth Kerttula, the caucus leader, implored Alaskans to speak out if they shared these concerns.

“Nobody would go to Vegas with those odds,” Rep. David Guttenberg, D-Fairbanks, told reporters during a recent news conference. “Nobody would even walk up to the table, put money down and say, I’m going to risk something, when there’s no chance of return except an empty promise.”

But Parnell argues the state can’t stand by and watch production decline further. Oil provides nearly 90 percent of Alaska’s unrestricted revenue, but forecasts point to a continued production decline. If that trend continues and is steep enough, some warn the state’s economic artery, the trans-Alaska pipeline system, runs the risk of shutting down within the next decade.

Parnell points to his push last year to cut the head tax on cruise ship passengers as proof that if you reduce taxes and create a more hospitable business climate, new investment will follow. According to his office, one cruise line plans 10 voyages to the state this season; another plans to add a ship in 2012.

In reaching an agreement with the industry, under which a lawsuit over the tax was dropped, the state was unable to solicit any firm promises of future deployments. Instead, the lines agreed to work toward that goal subject to economic conditions and their individual marketing strategies.

Parnell’s call for action on oil is getting support from within the business community and from some high-profile Alaskans, including former governors and U.S. Sen. Lisa Murkowski.

“If you want to take a one-year or a two-year view of something and call that the good of the state, then you can say that,” Parnell told reporters in defending his plan. “If you want to take a 30-year view and the assumptions used, then you can paint a case that demonstrates that we’re going to fill this pipeline, and we’re going to create jobs here that otherwise wouldn’t be created and have more revenue.”

He said both scenarios need to be considered.

The current tax regime features a base rate of 25 percent, and the progressive surcharge kicks in when a company’s net profits top $30 a barrel; the idea behind that is when times are good and oil is high, the state should share in that. But companies say it eats far too much into their profits, affecting future investment decisions.

The Revenue Department says the tax brought in nearly $3 billion in revenues in fiscal year 2010, slightly less than in 2009, but more than the state would have received under previous tax structures.

Parnell’s plan would change the progressive surcharge, subjecting incremental values to higher taxes. For units now in production, it would cap the surcharge at 50 percent when oil prices top $92.50 a barrel; for new fields, the cap would be at 40 percent at higher-priced oil.

Berman said the current tax structure, passed in 2007, came when people considered $100-a-barrel oil unusual. It’s not unusual anymore, he said, adding that he believes is probably right to try to reduce the high marginal tax rates.

“But as far as, is that the right thing to do or the best thing to do to encourage oil production? I don’t think I could say one way or the other on that,” he said.

What transpires in the coming weeks could well be the first real test of Parnell’s political power. He has a lot at stake; as one lawmaker pointed out in a recent hearing, Parnell and Butcher have their reputations on the line with this bill. And Parnell isn’t pulling back on his belief that urgent action is needed to spur more oil production — and that this is the way to go.

The first hearings on the proposal are scheduled on the Senate side this week, more than half-way through the 90-day session. And some leading senators have expressed concerns with the plan and questioned whether enough is known now to move ahead with it.

If the plan stalls, the question becomes whether Parnell sees it as critical enough to force a special session.

He’s not talking in those terms yet.

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