Alaska editorial: If oil drops, we'll have to help pay for services

Posted: Monday, May 15, 2006

This editorial appeared in The Anchorage Daily News:

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Proponents of legislation to boost oil taxes say the state deserves its fair share of revenues from the publicly owned resources buried beneath the tundra. Besides, they say, the oil companies are making record profits and it's about time the state raised its outdated and pitifully low oil production tax rate.

All of which is true - as far as it goes. The state's oil production tax rate is too low; the public owns the resource and is entitled to a bigger slice of the cash pie at high prices; and big oil companies are making big profits, while Alaska's tax rate is structured for the old days of smaller profits.

But some Alaskans have another reason for wanting to boost oil taxes. It's the fear that someday Alaskans may actually have to pay for the state services they have come to enjoy tax-free since the Legislature abolished the personal income tax 26 years ago. It's the fear that someday Alaskans may actually use Permanent Fund earnings to help pay for schools, roads and other public services - something other than the beloved individual dividend.

Higher oil taxes would help delay that day of reckoning.

One of the more interesting debate points over the oil tax legislation is not how much money the state would take in at high prices, but how the state would fare if prices ever dropped to about $25 a barrel. It's called the "crossover point" at which oil tax revenues under the proposed new system would be less than under the existing formula. The trade-off for a lot more state revenues at high oil prices is reducing the tax bill at lower prices, with the state sharing the risk as companies chase costlier projects. That's how it should be.

All of the versions of the oil tax change in front of lawmakers - the governor's bill, the House and the Senate versions - would mean less money for the state than under the current tax rate if oil falls to about $25 a barrel. And that's got some people upset.

But what they should be upset about is how deep a hole state finances would fall into at $25 oil. Based on state spending projections, the budget deficit at $25 oil could be close to $1.5 billion. That's under the current tax formula. Under the proposed tax changes, the red ink could become $1.6 billion, give or take. Either way, we'd be seriously hurting. Either way, Alaskans likely could need to spend Permanent Fund earnings or impose a personal income or sales tax to preserve public services.

Mark Myers, former director of the Division of Oil and Gas at the Department of Natural Resources, recently talked about his fear of less state revenue at low oil prices under the governor's oil tax rewrite. He was quoted in the Petroleum News, warning about the tax proposal: "How will we pay for government if this happens? Will a general income tax be proposed, or will the Permanent Fund be raided?"

The answers are yes and yes. If Alaskans want the services, and if the cash isn't coming in during periods of low oil prices, and if the state has spent down its savings, then, yes, people will need to start paying.

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