Oil profits tax bringing in $800 million less than expected

Posted: Wednesday, August 22, 2007

ANCHORAGE - The state will be getting $800 million less than expected from the new net-profits tax on the oil industry, according to a Palin administration report.

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The report says industry capital and operating expenses, which can now be deducted from profits before taxes, are twice as high as proponents of the Petroleum Profits Tax, or PPT, predicted 12 months ago.

The report, issued earlier this month, says it's too soon to know whether the law's incentives have spurred new investments or led to excessive deductions.

The huge gap between the tax as advertised and its actual performance supports the debate for a special legislative session on oil taxes scheduled for October, Palin administration officials say.

"It does put the exclamation point on the concern that we need to re-examine this," said state Commissioner of Revenue Pat Galvin.

The session is scheduled to begin Oct. 18.

Gov. Sarah Palin announced earlier this month that she is calling for a second look at the PPT, citing a cloud of corruption surrounding its origins. Three legislators have been charged in federal court with selling their votes on the tax to the oilfield-services company Veco.

In August 2006, the PPT's passage in the state House hinged on a single vote. Two Veco executives have pleaded guilty to bribing lawmakers to vote in step with industry on the tax. Critics say offers of money and jobs may have swayed enough votes to prevent the Legislature from approving a higher tax rate, or another sort of tax entirely.

Critics say the under-performance of the tax in its first year increases support for the review.

"It exposes the weaknesses in the net-profits system right away," said David Gottstein, a member of Backbone, a bipartisan group pushing state lawmakers to take a tough stance on oil industry taxation.

But industry officials say the unexpectedly high deductions reflect real increases in steel prices and other costs these days. Operating the North Slope fields is expensive, they say - and jacking up taxes again could hurt investment here.

"Increased costs aren't necessarily a bad thing. It means the level of investment is up," said Kara Moriarty, deputy director of the Alaska Oil and Gas Association. "That's the balance PPT was meant to strike."

Palin officials agree that industry costs have indeed risen. They say the high costs are probably here to stay, and are not related to one-time expenses due to last year's spills and shutdowns on the North Slope.

Former Gov. Frank Murkowski's administration officials apparently failed to anticipate this 12 months ago when pushing for the PPT, Galvin said.

The new law included a "progressive surcharge" meant to capture more windfall profits from high oil prices. When the PPT tax passed, advocates said the surcharge would kick in when oil hit $55 a barrel. Because of the higher deducted costs, however, the surcharge won't take effect until oil is between $60 and $63 a barrel, Palin officials said.

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