Berkowitz backs away from dramatic change in oil tax plan

Posted: Thursday, October 14, 2010

Gubernatorial candidate Ethan Berkowitz is rapidly rolling out new proposals for things he'd do as governor, but is quietly backing away from one of the most daring - a radical change to how Alaska taxes its oil.

Last spring Berkowitz, who spent eight years as Democratic leader in the Alaska House of Representatives, proposed Alaska switch to a "royalty" system of taxing oil.

"The 'All Royalty' approach is flexible, nimble and fair," Berkowitz said when proposing it.

Incumbent Gov. Sean Parnell called Berkowitz' plan "half baked" and said it would actually destabilize Alaska's economy.

Alaska taxes oil in several ways, including standard property and income taxes, but the two main methods are the current royalty system and the oil severance tax.

Alaska is unusual in that the state, not private individuals, generally owns underground resources on state lands. After the huge Prudhoe Bay field was discovered on Alaska's north Slope in 1969, money began flowing into the state's treasury.

Part of that came from the existing royalty system, under which 12.5 percent of the barrels of oil pumped out of the ground are owned by the state, which can either take ownership of the oil or the equivalent in cash.

The largest part of the state's oil revenue comes from the severance tax, essentially the selling of the state's oil to companies which will ship it, refine it and market it or resell it.

Alaska has over the years used a series of severance tax methods. The Economic Limit Factor was replaced in 2006 with the Petroleum Profits Tax. Following revelations of bribes paid by oil field services company VECO Corp. to hold down the PPT tax rate, then-Gov. Sarah Palin and Parnell, the lieutenant governor, joined with the Legislature to pass Alaska's Clear and Equitable Share Act, known as ACES.

Berkowitz said Alaska should abandon its severance tax system, and negotiate a separate royalty system for each field in order to craft a system which will encourage oil companies to more quickly produce Alaska's remaining oil and boost flow through the trans-Alaska pipeline.

Now, Berkowitz says ACES raised taxes too much and is driving oil industry investment from the state. He declined to say whether his royalty plan would reduce overall tax collections.

"That would have to be negotiated on an individual basis," for each field, he said.

An added benefit to the public from the royalty system, Berkowitz said, was a portion of royalty payments automatically go into the Alaska Permanent Fund. That would boost the size of the fund, and eventually permanent fund dividends, he said.

Berkowitz has since appeared to back away from such a dramatic change, telling the Alaska State Chamber in Juneau last month that he'd is now only proposing the royalty-only system for "new leases, non-performing leases, on a field-by-field basis."

Berkowitz' campaign website makes no mention of his changed position, however, and continues to call for a full royalty system.

"A 100% royalty solution more closely aligns the state's interest in revenue and industry's interest in production," it reads.

Berkowitz has declined repeated interview requests over several days seeking more specifics about how his proposal would be implemented. His campaign press secretary said the proposal has received little attention since the primary when it was criticized by opponent Sen. Hollis French, D-Anchorage, and that Berkowitz was not interested in discussing it further.

Gov. Sean Parnell said earlier this week Berkowitz' plan would undermine the certainty that companies need to make investment decisions, or even decisions to bid on leases if every lease would then have to be negotiated individually.

"That plan alone would destabilize our economy, drive jobs away and drive investment away," Parnell said.

The state has more than 1,000 leases on its land, and spent more than a decade in litigation over royalty agreements with oil companies.

"His original plan was to renegotiate every one of them," Parnell said, but even Berkowitz' new plan could limit new investment.

"Companies are not necessarily going to show up for our lease sales if they don't know ahead of time what the tax and royalty take is going to be," he said.

Companies can and already do negotiate royalty relief on an individual basis if they can show that they need the relief to be economically viable, Parnell said.

House Minority Leader Beth Kerttula, D-Juneau, was a top ally of Berkowitz when he was in her current job in the Legislature. Kerttula's caucus allied with some Republican legislators and the Palin-Parnell administration to adopt the ACES plan that Berkowitz is now criticizing.

She said she didn't support his all-royalty plan, but that wouldn't prevent her from supporting a fellow Democrat for whom she has high regard, and then work to change his mind if he's elected.

"I know that Ethan will take a good hard look at it if he's elected and do the right thing for Alaska," she said. "He always has."

• Contact reporter Pat Forgey at 523-2250 or patrick.forgey@juneauempire.com.



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