My Turn: Alaskans need to speak out about oil profits tax

Posted: Friday, October 19, 2007

As Alaskans consider the issues before us in the special session in Juneau, we pretty well know that most of the revenue that pays for state services comes from the oil owned by all Alaskans in common. We also know that the oil companies don't own the land or the oil beneath it. Alaskans own it, and they get a ⅛th share of the underground wealth. The oil companies get 7/8ths, and that represents the lion's share of the money.

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The state is well aware that pumping oil from the North Slope is expensive and has done something about it. Under the existing Petroleum Profits Tax (PPT), those expensive costs are deducted before arriving at the profit. After reaching the profit dollars and the taxes rate, the producers get an additional 20 percent tax credit for exploration. That's 20 percent right off the tax. Not bad so far, but the producers get to claim things that are quite misleading in order to inflate their government take a lot further than it really is. They do that by calling the ⅛th royalty a tax. It isn't.

If one defines the ⅛th royalty Alaska receives as a "tax," then the total government take may, at first, seem unreasonably high. But Alaska's royalty is not a tax. Rather, it's exactly like the oil royalty paid to a private land-owner in Texas. A royalty is not a tax any more than the royalty that an author receives from a publisher is a tax. A royalty is nothing more than Alaska's fair share of the resource it owns.

Including the royalty share as a tax makes the state's share of the revenue seem much higher than it really is. This is done by inflating the term "total government take" - which is how the oil companies refer to all the money that they do not get for themselves. Also consider that the federal taxes - which go to Washington, not Alaska - are also inappropriately included in the oil company description as "total government take." Property taxes paid to boroughs where the petroleum industry's pipeline and production equipment is located, are also frequently labeled as "government take," although the state of Alaska receives none of that revenue either.

Reasonable people will recognize that the oil companies are not suffering. Chevron, for example, is using its generous cash reserves not to explore and drill in new areas, but to buy back outstanding Chevron stock, a sure sign of a company alert to opportunities to increase its stock price.

Most new wells drilled by North Slope oil companies are drilled in the existing Prudhoe fields, to increase the amount of oil extracted from known accessible areas. But we must insist that the companies explore in new areas. That's why we reduced their taxes an additional 20 percent in the form of a credit on their taxes and why the state is essentially paying 20 percent of oil companies' exploration costs in addition to the deductions for the cost of exploration.

Oil companies always make money because they are carefully structured to be vertically integrated. When prices are low they still make money on pipelines, tankers, refineries, delivery trucks and the numerous gas stations that they own. Stock market and annual reports are good indicators of the value of an oil company and those reports show that the industry is doing very well. Stock prices of oil companies continue to beat the market, a sure sign that they are prospering. At today's prices, everyone with oil is doing very well.

But before I vote on any revision to PPT taxes, the Legislature must have thoughtful hearings, including testimony from constituents. Our Resources Committee will cross-examine experts. We will thoroughly review state input and documents comparing Alaska's taxes to other governments. The oil companies will send their best to Juneau to present testimony supporting their point of view.

The oil companies are saying through their radio and TV ads that we added a billion dollars last year. If that were so, we would not be going to special session. Finally, changing PPT cannot occur without a majority vote from both bodies of the Legislature as well as the concurrence of the governor. Today, we have the governor's proposed legislation, a measure that asks for fairness in taxation. I ask Alaskans to step up to the plate and speak out. Your testimony is no less important than input from the government and the oil companies.

Before I press the yes/no button to alter Alaska's tax revenue, I will have fairly and thoroughly considered the pros and cons of each point of view.

• Rep. Carl Gatto, R-Wasilla, is co-chair of the House Resources Committee.

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