A taxing dilemma

With new players trying to maximize benefits for state, lawmakers revisit gross vs. net controversy in session

Posted: Sunday, October 21, 2007

Gov. Sarah Palin won the election last year saying she supported a gross tax on Alaska's oil production, in contrast to the net tax on oil company profits pushed through by former Gov. Frank Murkowski.

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Now in office, Palin is proposing a series of fixes to Murkowski's Petroleum Profits Tax, keeping its controversial "net" structure.

"I was dragged, kicking and screaming, away from a gross tax," Palin said, when she announced the change.

A special session of the Alaska Legislature is now underway, taking a new look at the scandal-tainted tax, and some advocates of a gross tax are hoping to drag Palin back - either kicking or screaming - to their side.

That's the top priority of House Democrats, said Rep. Beth Kerttula, D-Juneau, House minority leader.

A gross tax would typically be based on the amount of oil produced, multiplied by the price of oil. A profits tax would make more money for the state when oil company profits are high, but could fall precipitously when the industry struggles.

A net oil tax has been acknowledged by supporters as more complicated to administer, but said to be worth it for its ability to encourage oil companies to make investments in Alaska.

One of the most important of those investments, said House Majority Leader Ralph Samuels, R-Anchorage, is for costly exploration for new oil. With old fields such as Prudhoe dwindling, keeping the trans-Alaska oil pipeline and state coffers fed will require finding new oil.

"We don't have people banging down our doors investing in the state of Alaska," Samuels said.

The state's oil-rich North Slope also has extensive deposits of expensive-to-recover heavy oil that may not be economically recoverable under a gross tax, but might be profitably recovered with some tax help under a net tax, said Sen. Bert Stedman, R-Sitka.

Even if that heavy oil doesn't provide much revenue to the state initially, development will help Alaska. Simply filling the pipeline to ensure smooth flow is a benefit, net tax advocates say.

Those arguments prompted Palin to swing her support to a net tax in her revisions to the PPT.

"As we evaluated the economic models, it became clear to me that a 'pure gross system' with no credits, would harm our long-term investment opportunity for new companies and wouldn't help develop our heavy oil," Palin said.

"Given this, our experts convinced me to offer something better, more creative and more intelligent," she said.

Palin said her plan is a "hybrid" of a gross and a net tax, but Kerttula said it looks more like Murkowski's PPT, with a few obvious problems fixed, making it more of a net tax than a hybrid.

"I'm not saying we shouldn't have some deductions, but it's a mistake to have a net tax overall," said Kerttula, a former oil and gas attorney for the Alaska Department of Law.

Kerttula acknowledged that some oil did cost more to recover, such as in remote fields and heavy oil in Prudhoe and other legacy fields.

"You don't have to have a net tax to have a tax credit that's targeted to what you want," she said.

"We know the kinds of things they need to pull that heavy oil out," Kerttula said. "Let's talk about deductions for certain specific things."House Speaker John Harris, R-Valdez, said last year's House discussion of PPT focused almost exclusively on a net profits tax, but that was because Murkowski was unwilling to accept anything else.

Then-Senate President Ben Stevens, R-Anchorage, similarly was only willing to accept a profits tax, he said.

Murkowski was defeated by Palin in his re-election bid, and Stevens did not run for re-election and has since been implicated in the oil industry's VECO Corp. bribery scheme.

Those changes mean Kerttula and her allies think they've got a chance to resurrect a gross tax that will get Alaska a bigger share of its oil resource wealth.

The total government take, an industry term used to encompass state, local and federal taxes and royalties, is lower than the worldwide average. In Alaska, the total government take is 61-62 percent, said Rep. Harry Crawford, D-Anchorage, an advocate of a gross tax. A proposed change in tax rate proposed by Palin would only move that up to 64 percent, he said.

"We need to go higher than what we're at," he said.

The Alaska Constitution requires the state to get the "maximum benefit," from its resources, Kerttula said.

Views differ on now to define maximum benefit. Kerttula wants revenue to pump up the Permanent Fund for when the oil runs out. Harris said the jobs the industry provides in the state may be even more important.

Giving gross tax advocates a boost is recent testimony by oil industry consultant Pedro van Meurs before the Legislature.

Van Meurs, Murkowski's top oil advisor last year, said he actually supported a gross tax as part of a total package that also included a windfall tax on high profits.

"It was interesting to see that the new governor says the PPT should have a gross component and a net component," he said.

That's what he believed all along, he said, though he called the gross component of Palin's plan "wishy-washy."

Sen. President Lyda Green, R-Wasilla, who doesn't think the PPT needs extensive revision at all, said she didn't like van Meurs' idea of including a gross tax "floor" in the bill to ensure minimum tax receipts for the government. Palin's tax plan includes a similar provision.

She said she wants to see how PPT works in practice until its scheduled review in 2011 before making changes.

Van Meurs said he expected receipts to go up as state auditors look into oil company tax returns.

Sen. Lyman Hoffman, D-Bethel, said he'd expect the state's oil producers to deduct as much as possible while trying to figure out a new tax scheme.

"This is a brand new system, and obviously the oil companies are going to challenge us there," he said.

While Republicans in the Senate and House leaderships mostly supported keeping the PPT as it is, some Minority Republicans in the Senate have been outspoken advocates of a gross tax.

Republican Minority Leader Gene Therriault, R-North Pole, and Sen. Tom Wagoner, R-Kenai, are backing a gross tax.

"A gross tax is more difficult to game," by the oil companies, Therriault said.

"It's easier to understand," he said. "It's easier to predict what the outcome is going to be."

Therriault predicted a hybrid tax would be adopted.

"I also understand we need incentives. You're not going to have a simple flat tax," he said. "There's always going to be complications."

Sen. Kim Elton, D-Juneau, a member of the Senate Working Group coalition led by gross tax opponent Green, said he remains a supporter of a gross tax.

"I do think we need a simplified tax system where the rules are set by the state and not interpreted by tax accountants that work for Exxon," he said.

Democrat Crawford has gone to the public before with ballot initiatives when the Legislature has failed to act on issues he thought were important, and been successful in doing that in the past. That could happen again, he acknowledged.

"If it has to be an initiative, maybe that's the way it has to be," he said.

Rep. Andrea Doll

• Party: Democrat.

• District: 4 - Mendenhall Valley, Auke Bay, Lynn Canal.

• Legislative tenure: first term.

Goal: "I would love to see the politics end, and everybody work together collectively for the benefit of Alaska. This tax will probably be in effect for at least 10 years. It's extremely important to have this thing on a firm foundation.

"We understand there is some disagreement between the president of the Senate and the governor. I think each side would like to be the one that comes out with the solution."

Her beef: Doll, who joined the Legislature in January, doesn't like the accusation that the entire Alaska Legislature was tainted by the actions of a few last year.

"Probably 90 percent of the Legislature came in good faith and spent hundreds of hours doing this to benefit the state."

What she'd support: Doll said she'd be happy with Gov. Sarah Palin's proposed bill, which increases tax rates and closes some deduction loopholes.

Sen. Kim Elton

• Party: Democrat.

• District: B - all of Juneau.

• Legislative tenure: third term in Senate, following two in House.

• Goal: "a new oil tax that people of Alaska have confidence in and returns a fair share of revenue from a resource we own."

• Last year: Elton was heavily involved last session in fighting from the minority against the Petroleum Profits Tax.

"I voted for a gross tax. I advocated for a gross tax," he said. "I voted against the PPT."

• His role: Elton is a member of the Senate Working Group and the powerful Senate Finance Committee, which will hear Palin's oil tax bill just before it goes to the Senate floor. Members of the Senate Working Group, the majority coalition, agree to vote together on the budget, but not on other issues.

"Members of Senate majority are not locked in to any votes," he said. "We're not going to acquiesce to anything this important to the future of Alaska."

Rep. Beth Kerttula

• Party: Democrat.

• District: 3 - downtown, Douglas.

• Legislative tenure: fifth term.

• Goal: Kerttula wants to see changes to the way the state taxes oil "so we have a well-structured method to be able to get the maximum benefit as the constitution requires us to get out of our precious resources."

• Last year: Kerttula called the past corruption in the Legislature "sickening."

"It was heartbreaking to have watched it," she said.

• Her role: This year, the House Democrats that Kerttula leads have a stronger minority than they did last year when the Petroleum Profits Tax passed over the objections of Democrats led by former Minority Leader Ethan Berkowitz.

• This session: With the "bad apples" gone and a stronger minority, it is more enjoyable to be a legislator, she said. She's been having fun watching a "terrific" freshman class of legislators in the House delve into complicated oil tax policy and try to craft solutions for the state.

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

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