Democrat-backed oil tax bill gets hearing

Oil industry opposes effort to roll back tax breaks for producers

Posted: Thursday, April 15, 2004

A Democrat-sponsored bill boosting oil-production taxes faces opposition from oil companies and skepticism in committee.

House Bill 441 would roll back tax exemptions that were codified under a 1989 law known as Economic Limit Factor, or ELF. Bill sponsor Rep. Les Gara, D-Anchorage, argues that the exemptions no longer make sense.

The state's severance tax is 15 percent, but 11 of 14 oil fields that have come online since 1989 pay little or none of it. The formula that governs the ELF means that the oil companies' profit dwarfs the state's tax take when oil prices are high, as they are now at roughly $32 per barrel. When the price of oil is low, the state's tax income would be more than the oil companies' profit, but the margin between the two is much less, Gara said.

"At low prices, the state excess never approaches the oil company excess at high prices," he told the House Ways and Means Committee on Wednesday.

Gara's bill would establish a minimum 5-percent tax. It would raise an oil field's severance tax at oil prices of more than $20 per barrel. The bill uses a formula that would increase the tax proportionately with oil price increase, with a cap of 25 percent.

The measure also would reduce the severance tax if oil prices dipped below $16 per barrel. If prices dropped below $10 a barrel, half the tax would be waived, and the other half would be deferred until prices rose above $16 per barrel.

The bill exempts "heavy oil," which requires more expensive extraction procedures.

Former deputy commissioner of revenue Deborah Vogt also testified at Wednesday's hearing. She said ELF made sense in 1989 when it was introduced, to cut a break to the smaller oil fields just getting online. But now those fields have expanded and many pay no tax. At the same time, production is declining in the larger fields that pay most of the tax. Gara said the average North Slope production tax was 13.5 percent in 1993. Today it is 7.5 percent.

"We should not be producing oil that completely escapes taxation," Vogt said.

But Tom Williams, BP Exploration Alaska tax counsel, said the bill mistakenly focuses on how much money there is for the state to take.

The real question is, "What will be the impact on future investments if the state were to take it?" Williams said.

Mark Hanley, public affairs manager for Anadarko Petroleum Corp., said Gara's proposal could stymie the development of new fields.

"It's not just an easy numbers game," Hanley said. "You need to understand the economics and the investment alternatives."

Bill Corbus, commissioner of the Department of Revenue, said the administration doesn't support changes to ELF at the moment.

"This is a complicated subject that should not start being addressed with 30 days left in the session," Corbus said.

Ways and Means Committee Chairman Rep. Mike Hawker, R-Anchorage, said the administration's concerns were valid and he didn't know whether the bill would pass his committee.

"I worry about approaching something as material and as detailed as this is in a legislative session," Hawker said.

The committee did not finish hearing the bill Wednesday and planned to take it up again Friday.

Gara has said he believes the bill will pass if it reaches the House floor. He said the administration's opposition is misplaced.

"It seems the administration is focused on using the dividend and the permanent fund as their fiscal plan. When the largest oil companies in the state are taking in $3-4 billion for Alaska oil and when the state's profit share is dwarfed by that, I don't think it's right to look at the permanent fund as your first option," Gara said.

• Masha Herbst can be reached at masha.herbst@juneauempire.com.



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