Indictments may be downfall of tax

Lawmakers aim to shift tax from profits to gross revenues

Posted: Monday, July 30, 2007

House Democrats led by Rep. Beth Kerttula, D-Juneau, would like the opportunity to do what they were unable to do last year: Adopt a system that taxes oil on gross revenues, instead of a net tax on profits alone.

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They may get that chance this fall.

With doubts looming about the honesty of the Legislature's vote last year on the controversial Petroleum Profits Tax, Gov. Sarah Palin said she's likely to call a special session to reconsider the tax.

"I don't have any question in my mind, this law needs to be changed, no ifs, ands or buts," Kerttula said.

Three House Democrats last week issued a report saying the state was losing $1.5 billion a year by taxing the state's oil at below the world average. Reps. Les Gara and Bob Buch, both of Anchorage, and David Guttenberg of Fairbanks based their conclusion on information provided by three consulting firms hired by Legislature.

They said the world average for "total government take" was 67 to 73 percent. Total government take is how experts calculate average tax rates around the world.

In Alaska the take was at 61 percent, they said.

Some Republicans were skeptical that Alaska could get that much more money out of the oil industry, and skeptical of the Democrats' motives as well.

"If Les Gara had his way, he'd tax the oil industry right out of the state," said House Speaker John Harris, R-Valdez.

Given what has happened since Alaska adopted the Petroleum Profits Tax last August, Harris said a new look at the PPT tax may be merited, however.

"Was it done correctly? Was there undue influence put on legislators?" Harris asked.

"I don't have the answer to that, but that's one of the things the governor is concerned about," he said.

Since the tax was adopted last year, half a dozen members of the Legislature have fallen under suspicion of taking bribes from oil industry advocates of the PPT. The chief executive officer of VECO Corp., an oil field services firm and one of the state's most politically connected companies, has pleaded guilty to bribing several legislators.

Former state Rep. Bruce Weyhrauch, R-Juneau, pleaded not guilty to bribery charges and is awaiting a fall trial.

The tax so far has brought in millions of dollars less than expected when it was adopted, but Palin administration officials said they're still not sure why because the tax is difficult to audit.

Department of Revenue officials last week declined to say how much the tax had brought in since spring, when their earlier statements were made.

Palin said earlier she is "likely" to call a special session to look at the Petroleum Profits Tax again, but has since said she is awaiting a review of the tax receipts so far from the Department of Revenue.

Kerttula said analysis isn't needed to address the obvious flaws in the PPT.

"There are a lot of changes that you don't need to wait for numbers on," she said.

Abandoning the PPT and going to a gross tax could be done immediately, she said.

Sen. Kim Elton, D-Juneau, is making similar arguments in the Senate. He and fellow Sens. Hollis French, Bill Wielechowski, and Johnny Ellis, all Democrats from Anchorage, have introduced Senate Bill 175 to go back to a gross tax.

"If we don't fix this tax in a special session this year, Alaskans may stand to lose another $2 billion. That would be irresponsible," Wielechowski said.

Loss estimates vary due to changing estimates of oil prices and production volumes.

The Democratic senators introduced their bill after Gara and others introduced a similar bill in the House of Representatives, but it never got out of the House Oil and Gas Committee, chaired by oil industry ally, former Rep. Vic Kohring.

House leaders removed Kohring from his chairmanship after he was indicted by federal prosecutors and accused of taking oil company bribes. He resigned his legislative seat, but has pleaded not guilty and is awaiting trial.

Sen. Bert Stedman, R-Sitka, agrees the PPT needs to be changed, but for different reasons. The tax was adopted as part of former Gov. Frank Murkowski's plans to get a North Slope gas pipeline.

Now that the new governor is using the Alaska Gasline Inducement Act to try to get a pipeline instead, that part of the tax system is no longer needed.

The previous effort called for the state to take its royalties and severance payments in-kind, meaning that the state would have to market and sell its share of the gas itself. Palin proposes the state take its payments in cash.

"That needs to be fixed, in my opinion, and sooner rather than later," Stedman said.

Stedman is worried, however, that the Legislature may go too far and adopt an oil tax system and rate that discourages development.

"Do we, the state, want to have an oil tax rate set to stimulate development?" he said.

One way to do that is to include a tax credit for oil company investments that help them bring up more oil. The PPT includes such a credit, though Kerttula and others have criticized how it is structured.

The challenge with a gross tax, Stedman said, is that it taxes the heavy, viscous oil at the same rate it taxes the easy-to-recover light oil. That might lead oil companies to abandon marginal heavy oil fields, said Stedman, co-chairman of the powerful Senate Finance Committee and a member of the Senate Working Group coalition that controls the Senate.

"We're going to leave potentially billions of dollars in the ground," under a gross tax, he said.

A fellow Republican senator, Tom Wagoner of Kenai, though not a member of the majority coalition, said during the session that he would support a gross tax simply because it was the only one that was easily verifiable.

With a profits tax "you don't know what the companies are trying to write off," he said. "One thing I always worried about was the gaming of the system," he said.

Speaker Harris said there was no chance of getting a gross tax through the Legislature last year because even if it had passed the House, it would not have made it past former Senate President and oil-industry ally Ben Stevens, R-Anchorage, and Murkowski.

"You had a governor who wouldn't approve a gross tax, and a Senate that wouldn't approve a gross tax," he said.

Palin so far has not committed herself, but Harris and Kerttula said that if Palin were to propose a gross tax, she could frame the discussion at a special session the way she wanted.

• Contact Pat Forgey at 523-2250 or

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