To make Alaska more welcoming for companies to develop a natural gas pipeline, Gov. Sarah Palin is proposing to freeze tax rates for 10 years.
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That might give the developers the kind of fiscal stability they say they need to build a $20 billion to $30 billion gas pipeline - but it might also be unconstitutional.
Alaska's Constitution bars the state from ever giving up its taxing powers, and keeps one Legislature from binding future legislatures.
"My initial reaction was that it is unconstitutional," said Sen. Hollis French, D-Anchorage, of Palin's Alaska Gasline Inducement Act, for which hearings began in the Legislature this week.
The issue of constitutionality could pose a problem for a governor who based her campaign, and much of her political persona, on her abiding belief in the Alaska Constitution.
Members of Palin's administration, who also have a strong belief in the necessity of building a gas pipeline, say they've figured out how to fix the tax rate, and do it constitutionally.
The state, said Revenue Commissioner Patrick Galvin, will sign a contract with the gas line developer in which the state commits to hold tax rates steady. To do so, the contract will give the pipeline developer a tax credit to make up for any increases imposed.
"It's the equivalent to freezing the taxes, but it's not the mechanism, in order to comply with the concerns that have been raised," Galvin said.
The freeze would come into play only if the Legislature attempts to raise taxes within 10 years.
"It is structured in such a way as we stay within our powers," Galvin said.
At the press conference announcing the Alaska Gasline Inducement Act, Attorney General Talis Colberg acknowledged there was some doubt about the issue.
"There's always going to be a question on something like this," he said.
Rep. Reggie Joule, D-Kotzebue, said Palin's proposed act might not be in compliance with the constitution but might be necessary to get the gas line.
"Maybe we need to change our constitution to accommodate it," he said.
Former Gov. Frank Murkowski failed to win a gas pipeline for Alaska last year. Among the issues on which his effort foundered were claims that he'd given away the state's taxing power for decades. His plan included a 30-year freeze on oil taxes and a 45-year freeze on gas taxes.
"If it's not constitutional for 30 years, why would it be constitutional for 10 years?" asked Senate President Lyda Green, R-Wasilla, leader of the bipartisan coalition that controls the Senate.
Galvin said Palin's proposal has many differences from Murkowski's.
"It is different in that it is just a tax on gas production. It is not on every aspect of the state's taxing authority on oil, gas and everything else that was locked into the previous arrangement," he said.
Green has assigned Palin's AGIA bill to the Senate Judiciary Committee, where its constitutional issues will be reviewed. French chairs that committee.
Some oil companies have said that for the deal to be more attractive, they need assurance the tax rate will not go up.
Legislators bristled, however, when Exxon Mobil Corp. Chief Executive Officer Rex Tillerson recently criticized Alaska, saying it had changed tax rates some 13 to 14 times on the company.
"Alaska does not have a good record on fiscal stability," Tillerson was quoted by Dow Jones as saying at an industry conference.
"I think he's completely wrong," said Beth Kerttula, D-Juneau, the House minority leader. "In reality it's been twice, in decades," she said. Kerttula was formerly an oil and gas attorney with the Alaska Department of Law.
BP-Alaska spokesman Steve Rinehart said his company is still analyzing Palin's AGIA proposal and isn't ready to endorse it.
"We need a balanced, effective method to achieve fiscal stability," he said. "At this point, it is not clear this provision would provide the stability necessary."