Expert: Proposed tax rate behind times

Consultant suggests base tax of 25 percent, instead of governor's proposed 20 percent

Posted: Tuesday, March 07, 2006

Alaska is considering dropping a regressive oil tax system, but in favor of one that is not as progressive as it could be, an international petroleum consultant told lawmakers Monday.

"(The governor's proposal) would just bring Alaska up to the end of the last century," said Daniel Johnston, testifying before a joint meeting of the House Resource and Finance committees. The committees are examining Gov. Frank Murkowski's proposal to tax oil producers 20 percent on net profits, instead of the current production-based tax.

"You just have to have a progressive system. It's the year 2006. Everybody's going in that direction, and for good reason," Johnston said. "It will make future citizens more comfortable when they know, 'Gee, oil prices went up and our share of the profits went up, too.'"

The Legislature is in its third week of hearing testimony that has largely centered on the amount of the tax and the tax credits offered to encourage future exploration.

While many legislators pressed Johnston to pick an ideal flat tax rate, the expert recommended a system with rates that move up with the price of oil.

A base tax of 25 percent, with a 20 percent credit for exploration, could be a starting point, he said. The tax rate could increase from there at certain profit levels.

At high oil prices, the governor's proposal as is could earn the state $1 billion more annually than does the current system. It asks for a tax rate of 20 percent, while Murkowski's leading consultant recommended a rate of 25 percent and other lawmakers are pushing for 30 percent. The difference between the percentages could mean hundreds of millions of dollars.

The three major producers operating in the North Slope and in negotiations with the state to build a $25 billion natural gas pipeline - ConocoPhillips, Exxon Mobil and BP - said passing the new tax bill is necessary for them to complete a contract.

The producers last week cautioned the Legislature against raising the tax rate above 20 percent, though. A higher rate would be a disincentive for future exploration, their representatives said.

Johnston said the governor's proposal beats the current system but would leave some money on the table.

"It takes us from being regressive to being neutral," Johnston said.

House Resources Co-Chairman Jay Ramras, R-Fairbanks, said he understood Johnston's idea for a progressive system as one that would kick in after oil prices hit high numbers, such as $60 per barrel. With instability in many oil regions around the world, there's a chance prices will remain at that level or more, Ramras said.

Rep. Les Gara, D-Anchorage, said he supports the idea and that the Democrats proposed a similar plan two years ago to create a tax rate with a sliding scale.

"It certainly needs to be fined-tuned," said Gara, of Johnston's suggestion. "It's nice to hear what Dr. Johnston said about it. But it's probably academic at this point."

The Resources Committee will discuss changes to the bill in a few days and take action next week, he said. At this point, the committee members are not committed to everything that is in the governor's proposal, Ramras said.

Johnston also said the bill is problematic because it tries to be a "one-size-fits-all" plan. He said it's difficult to recommend an ideal percentage for the state's overall take in oil profits because Alaska has four different oil regions with separate needs.

"With the legacy fields like Prudhoe Bay, there is little margin for error. Getting it wrong by even one or two percentage points of 'government take' will be measured in the hundreds of millions of dollars," Johnston said.

Last week, representatives from Chevron, the dominant operator in the Cook Inlet, said the cost of production there his risen to the point that the company is at "break even" on earnings at $45 a barrel.



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