Oil tax debate shifts

Posted: Thursday, July 27, 2006

A new phrase is being heard in the corridors and committee rooms of the Alaska Capitol this week.

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Gross versus net.

That is, should oil companies pay taxes based on the amount of oil and gas they produce in Alaska or based on their net profits?

Or, more simply, should a company's operating and capital costs be taken into account when the state taxes them?

That's the focus of debate as the Legislature tries for the third time this year to rewrite Alaska's production taxes.

It's a tough issue because lawmakers are trying to come up with a formula that will raise taxes but also encourage companies to spend more money to develop new oil and gas fields. Too high a tax, and companies won't want to spend their money in Alaska - and the state's oil production will continue to drop.

"It's incumbent upon us not to kill the goose that lays the golden eggs," said Rep. Jim Holm, R-Fairbanks.

Gov. Frank Murkowski introduced for the third time this year a bill that he says strikes that balance: a flat tax of 20 percent on companies' Alaska profits and tax credits to give oil companies the incentive to invest more of their money on developing wells and fields.

That plan has been repeatedly rejected by the Legislature as being too generous to the oil companies. The House and Senate raised the 20 percent tax rate, inserted a sliding scale that would increase the tax even more at high oil prices, but then twice failed to agree on what the final rates should be.

This time, a growing number of legislators are questioning not the tax rate, but the entire structure of the governor's net-profits tax proposal.

They say a gross production tax would be less complicated and easier to audit. If a big oil company's tax is based on their costs, they say, those companies will be inclined to manipulate those costs to their benefit.

The state's largest producers, BP PLC, Exxon Mobil Corp. and ConocoPhillips, could also use the system of oil credits to subsidize building gas fields such as Point Thomson, they say.

"I don't have a lot of confidence that Exxon and Conoco and BP are going to report profits the way I think they should be reported," said Rep. Les Gara, D-Anchorage.

Gara, Sen. Tom Wagoner, R-Kenai, and Rep. Eric Croft, D-Anchorage, all have proposals to tax companies' gross oil production instead of their profits.

Gara, who presented his plan to the House Finance Committee on Wednesday, wants to impose a minimum tax of 5 percent tax of the value of the oil produced in all the fields in Alaska. The three fields that now pay above 5 percent would keep their existing tax rates.

The rates would increase as the price of oil rises above $20 per barrel and decrease when the price drops below $16 per barrel.

Gara said besides increasing revenue to the state, his plan also would encourage investment in three ways. First, his bill includes provisions to give independent producers better access to the North Slope. Second, oil companies would be able to appeal for tax relief if they provide proof of need. And finally, they would be eligible for exploration tax credits.

Wagoner plans to unveil his proposal Thursday, and the House Finance Committee will hear Croft's bill the same day.

Legislators are split, and it goes beyond party lines. House Speaker John Harris, R-Valdez, and Wagoner support a gross production tax, joining Gara and other Democrats who have been calling for such a plan the past two legislative sessions.

Others, including some Democrats, say the fear of cost manipulation is overstated if the state is adequately prepared to audit the oil companies.

"I think I'm not as paranoid as I initially started out being, about being gamed, if we do the kinds of things we need to do and we how staff up for this," said Rep. Reggie Joule, D-Kotzebue.

The "gross versus net" debate has turned into quite a struggle, and there are just about two weeks left in the special session to come up with a solution, said Rep. Mike Kelly, R-Fairbanks.

"We've got to get 32 yeses to get something out of here," Kelly said, speaking of the 21 votes in the House and 11 votes in the Senate needed to pass a bill.

There is yet another proposal in the works that many lawmakers quietly say could be the compromise that passes the Legislature. The proposal by Reps. Mike Hawker and Ralph Samuels, both R-Anchorage, would determine the companies' tax rates by the amount they invest in the state.

The details of the measure are still being worked out, Hawker said, but they hope to introduce it this week.

"The question is, does it (cover) all the areas where various perspectives in the Legislature agree and strike a sufficient balance in the areas we don't agree, to get the 21 and 11 votes we need to get it passed?" Hawker said.

No legislator claims to know with certainty which approach will actually slow the 6 percent annual decline of North Slope oil production. Or whether any action the Legislature takes will cause major oil companies to spend more money in the state.

"We are just a small portion of big companies' portfolios," Holm said.

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