Alaska editorial: Kudos to lawmakers for new oil tax plan

Posted: Thursday, August 17, 2006

This editorial first appeared in the Anchorage Daily News:

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Legislators have rewritten the state's oil and gas production tax. Congratulations. It took two full 30-day special sessions after the regular session to get there, but speed was never the issue. Bringing the state tax in line with today's higher oil prices and offering incentives for new investment were the goals.

It looks like lawmakers did a good job reaching those goals. No, the bill is not perfect. Some don't like allowing companies to deduct their operating expenses, especially pipeline repair costs. Others believe there are too many tax credits, or too few. Others believe the tax rate is too high, or too low. And, hopefully, Alaskans don't discover leaks and destructive sludge in the lines of tax code in the years ahead, after the new law is tested in audits.

But it's so much better than the old law that Democrats, who have been pushing for changes for years, and Republicans, who only came on board this year, should share credit for pushing, pulling and haggling to reach a compromise.

The legislation will reverse the long decline in the state's production tax rate. The formula driving that decline was last amended 17 years ago and needed to go. Lawmakers elected not to amend the formula and instead tossed it aside and switched to a different tax structure, calculating the amount owed to the state after deducting for exploration and development costs, pipeline and oil tanker transportation charges. Such a tax on net income should - it had better - encourage companies to spend money on developing the North Slope's more costly, heavy oil reserves. That's the purpose behind the new tax system.

That, and giving the state a bigger share of oil revenues at high prices. The legislation certainly does that.

At today's $70-plus price for a barrel of oil, the new tax structure takes about $200 million a month from the producers' side of the ledger and puts it into the state treasury - though that estimate is roughly based on last year's North Slope production, a level certain to drop this year. At $60 a barrel, it's $100 million more a month than under the existing law.

The tax changes are retroactive to April 1, giving a boost to state receipts during the months of record-high oil prices.

The bill also sticks out the state's fiscal neck a bit by allowing companies to not only fully deduct North Slope costs, but get credits for capital investments from the past five years and the years ahead. Allowing deductions and credits for the same $1 investment means the state will cover - through the tax breaks - more than 40 percent of companies' spending on exploration and development projects.

To see whether it all works, the bill includes a provision requiring the Department of Revenue to report in January 2011 the effects of the new tax on oil and gas exploration and production in Alaska, and on attracting investment dollars and more companies to do business here.

No doubt there will be indications in four years whether the incentives are working, whether the state is encountering serious tax audit problems as many have warned, and whether the package is helping to stem the steep decline of North Slope production.

But considering how long it takes to find and bring on line a new oil field - the Alpine satellite fields of Fiord and Nanuq are going into production this year, seven years after the first discovery well - it could be a while before Alaska sees any significant new oil flow from the tax changes.

Let's hope this works.

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