Empire editorial: Oil tax must be measured against global competitors
Gov. Sarah Palin deserves credit for facing what some lawmakers still refuse to admit: Alaska's oil tax system needs revisiting.
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Although the oil companies have claimed the state's tax system has been monkeyed with too many times already, the fact is the state has revamped the system only once, last year, after 17 years with the same system.
When the Alaska Legislature approved the Petroleum Profits Tax, or PPT, it was supposed be a marked improvement over the old system, but it hasn't come close to delivering the revenue expected.
PPT also was crafted by a Legislature tarnished by bribery and extortion, laid open by an ongoing federal investigation that has led to the conviction of two former lawmakers and charges against others.
The Legislature meets Thursday in a special session to retool that tax plan. Palin's proposal, dubbed "Alaska's Clear and Equitable Share" or ACES, includes a 25 percent tax rate on net profits. At $70 per barrel, ACES would fill state coffers with $2.9 billion a year, up from $2 billion a year under the system now in place.
Lawmakers, no doubt, will wrangle over and likely reshape many of the complex pieces of the governor's proposal. One piece that absolutely should remain is the elimination of a credit under the PPT that allowed oil companies to get breaks for capital expenditures in the five years prior to passage of the law. Based on past actions, that credit was a giveaway that did nothing to encourage future exploration and development.
Some legislators will continue to debate whether to tax oil companies on their gross or net revenues. The governor originally was in favor of taxing the gross, but backed down after digging into the details.
Her administration argues that a gross tax is more problematic than it appears at first blush because the economic profiles of new and future oil fields are so different. They vary widely on how much money they require up front for development and when they will get a return on investment.
The administration says coming up with a gross tax that would be fair for all fields isn't possible. A tax that makes sense for one area could make another project too expensive to launch because of the amount of time it takes to get a return on the investment.
Some Democrats have argued that the state should at least tax the gross on existing fields because they're already developed and the state has already lost considerable income on them under the system in place before PPT. But the administration says a gross tax on these fields poses a problem too, because within them are pockets of untapped oil, once again with varying potential and timelines for profits.
The strongest argument for a gross tax is that corporate bookkeepers can manipulate profits far too easily, making it difficult for the state to get its fair share. Safeguarding against accounting measures that shortchange the state requires particular care when crafting a new tax system. Palin has proposed several such measures and putting them in place is absolutely essential for a net tax to work well.
If the state continues with a net tax, it must ratchet up its auditing and commit to maintaining highly skilled auditors who have the expertise and resources to thoroughly review oil company numbers. Broad-based descriptions of deductions must be replaced with highly specific rules on what's allowed. The state also must draw up extremely clear and specific requirements for information the oil companies must provide.
The biggest question - and the trickiest - is how much oil companies should be taxed so Alaska remains competitive globally.
Palin proposes oil taxes that would be higher than those in the United Kingdom, but lower than those in Norway. Her administration says those are better countries for comparison than others, such as Nigeria and Azerbaijan, because they are more similar to Alaska in terms of political stability and infrastructure.
As legislators hear testimony by experts and various players during the special session, they need to pay particular attention to how Alaska would stack up against other countries. That's difficult because of the complexity of tax structures and the many different variables in each.
Legislators also need to avoid the extremes - either wanting to sock it to the lucrative oil companies or blindly fearing that any rise in taxes will drive them away.
Alaskans need to know that the tax structure was forged without illegal influence by the oil industry, and this special session gives the state another chance to get its fair share while remaining competitive on the world scene.