Alaska editorial: Face unknowns and choose gas tax system

Posted: Thursday, June 01, 2006

This editorial first appeared in the Anchorage Daily News:

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When legislators return to work after their Memorial Day break, it's time they make the decision and adopt a new oil and gas production tax.

Alaska has not changed its tax formula in 17 years. It does not work at today's higher oil prices, and it does not provide enough incentives to draw the billions of private investment dollars needed to build new production on the North Slope.

But thinking that any changes in the tax today must somehow go unchanged until 2036, as the governor and major North Slope producers would like, is setting the alarm clock way too far into the future. The debate over the proposed 30-year lock will come later, as part of the proposed North Slope natural gas pipeline fiscal contract. The companies want the contract to ensure "fiscal certainty," meaning they want to know that the state's oil and gas tax laws in the first year will be the same three decades later.

Legislators, however, need to set aside that issue and focus on the question before them today, which is to adopt a new oil and gas production tax system. There's too much money at stake for Alaska to delay any longer.

If future legislators later see a need to change the tax laws, to clear up problems or adapt to changing economic conditions, they have that right. Indeed, they have that responsibility.

Meanwhile, supporters and opponents of different proposed tax rates are tossing around numbers like $1 billion a year in additional state tax revenue at $60 oil, or $1.5 billion, or maybe just a few hundred million additional tax dollars a year at lower prices. Or, if prices ever dip back into the $20s per barrel, the state would collect less money than it does under today's tax rates.

There are a lot of choices, and there is a lot for legislators to consider. Problem is, every one of those revenue estimates will be proven wrong.

Not because the people who did the work couldn't add or made mistakes. It's because predicting future tax revenues is an educated guess, not a science.

No one, no consultant - no matter how impressive the resume - no economist, no elected official can know future oil prices or future construction costs, operating costs, market conditions or profits for Alaska oil and gas operations.

So no one can really know with any certainty how much the new tax would raise in future years.

That means the 60 legislators need to listen, then make the best decision possible under difficult circumstances.

Our advice to lawmakers is this: It's more important to focus on how much the state might earn at $30 and $40 oil than at $60 or $70 oil. Let's not kid ourselves. When prices are super high and tax revenues are up, Alaskans will spend whatever comes in, saving nothing for leaner years. Therefore, it's more important to structure the tax so that we receive more at those middle prices, to ensure that the state can continue providing essential public services.

Any revenue from a gas pipeline is a decade away. There is a statewide political phobia against personal taxes or ever using the Permanent Fund for anything but dividends. And Alaska has no long-term fiscal plan to deal with the years when oil revenues fall short of paying the bills. So the smart move is for legislators to set the new base rate for oil taxes to protect the treasury when prices drop below this year's record highs. The super-high-price years are less of a worry; there should be more than enough money to go around.

It's time to decide.

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