Auditors account for tax shortfall

Officials concerned about the future of petroleum dividends

Posted: Sunday, April 15, 2007

State Department of Revenue officials say they have accounted for some of the shortfall in the first year of the state's new petroleum profits tax, but more questions and some troubling concerns remain.

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The new tax applied to nine months of 2006, but the companies it covered were allowed to pay taxes under the old tax method while new regulations were being written.

Then, at the start of this month, a "true-up" payment of the difference was made.

That payment was eagerly awaited by lawmakers hoping to find out whether the controversial tax they adopted last year was paying dividends.

Results were disappointing.

When the electronic funds transfers for the payments arrived April 1, they amounted to only $813 million, well below than the $950 million the state had expected.

Commissioner of Revenue Pat Galvin told reporters Friday that accountants have been able to explain some of the shortfall. State auditors are poring over tax returns, but Galvin said there are too few auditors to do the job. More are being recruited.

Some of the shortfall, $66 million, came from higher than expected tax payments under the old system. That means the state still got the money, but it didn't come at the expected time.

Part of the remaining $71 million shortfall appears to stem from oil companies' reporting higher than expected deductions for operating expenses, offset somewhat by lower than expected capital expense deductions.

Higher deductions amounted to $50 million of the $71 million shortfall, with $21 million still unexplained.

Galvin said he found the deductions troubling, because the petroleum tax structure was designed to spur investment in capital expenditures that would bring in more oil and more money for the state.

North Slope oil production has been declining at about 6 percent a year, though in recent years high oil prices have kept state revenue high and masked that decline.

"We can make up that decline with new investment," said Dave Van Tuyl of BP, one of the three major oil companies operating in Alaska.

The troubling trend in petroleum tax revenue so far is that while it has been less than 10 percent under expectations, it could fall further in the future.

PPT provides valuable tax credits for capital expenditures. In 2006, however, the companies claimed less of those than expected, Galvin said.

"It is far to early to attribute where PPT is resulting in a change," he said. "These are large corporations that make decisions with long lead times."

If the operating expenditures stay high and PPT spurs new capital expenditures that reach previously expected levels or higher, tax revenue could drop much further.

"That would be a significant concern, yes," Galvin acknowledged.

Gov. Sarah Palin has been skeptical of the PPT, but Galvin said information about whether the tax is accomplishing its mission of promoting more oil production and bringing in more revenue will clearly not be ready for the current legislative session.

State Rep. Les Gara, D-Anchorage, was a critic of PPT when it was adopted last year. He said he wasn't surprised that deductions came in higher than expected and brought in less revenue.

"That's what happens when you have an oil tax that depends on oil companies' determination on what they get to deduct. If you give Exxon room to deduct, they're going to deduct, and it is going to cost us," he said.

Galvin declined to specify what any company had paid, citing taxpayer confidentiality, but he said none stood out significantly.

• Pat Forgey can be reached at

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