Legislators hear Palin's views on net tax

Administration looks to patch the holes in Petroleum Profits Tax

Posted: Monday, October 22, 2007

Alaska legislators gathered at the Capitol on Sunday for an unusual joint session to hear why Gov. Sarah Palin had changed her mind on taxing the gross value of Alaska's oil revenue.

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Instead, she'll now try to patch the holes in former Gov. Frank Murkowski's Petroleum Profits Tax, based on net revenue. The oil tax structure brought in hundreds of millions of dollars less than expected in its first year.

On Sunday, Palin sent her top two oil tax experts, Commissioner of Revenue Pat Galvin and Commissioner of Natural Resources Tom Irwin, to explain the shift to the House Special Committee on Oil and Gas and the Senate Resources Committee, which met in a joint session.

The governor ran for election on a gross tax, and the public wants to know why she changed, said Sen. Gary Stevens, R-Kodiak, Senate majority leader.

Palin's oil tax proposal, called Alaska's Clear and Equitable Share, is built on the backbone of PPT, but is intended to close loopholes and raise much of the money PPT was expected to raise.

Irwin said the initial intent in the Palin administration was to adopt a gross tax, but teams from both departments could not figure out how to do that and still provide needed incentives to produce oil from marginal fields.

"We spent untold hours in the governor's conference room, in Department of Natural Resources' conference room, in Department of Revenue's conference room, having very vocal" discussions, he said.

No pure gross or pure net tax was ever realistic, he said, because even gross tax proponents agree some tax credits to spur development are needed. At the same time, net proponents want a gross "floor," so the state will still get some revenue no matter what happens if oil prices fall precipitously. The conclusion, he said, was to keep Murkowski's PPT and try to fix it.

The biggest problem with the PPT was that it failed to adequately project the costs the state's oil producers would seek to deduct from their taxes, administration representatives testified Sunday.

Galvin said his department did the best it could with the information it had available, but the Legislature had adopted a tax without adequate information about what costs would be.

"It was a very educated guess, but it proved to be inaccurate," he said.

Senate President Lyda Green, R-Wasilla, who backed the PPT last year, said the bill's fiscal notes provided by PPT's advocates guessed wrong about how much the tax would bring in.

"Most fiscal notes are wrong," she said. "It's no one's fault."

In the past, the Department of Revenue has had to predict the price of oil and the amount of production. With PPT, it also has to predict how much oil companies will invest and be able to deduct.

"Isn't this an inherent problem with a net tax?" asked Rep. Mike Doogan, D-Anchorage.

Galvin said his department's ability to predict industry expenditures is getting better.

Sen. Lesil McGuire, R-Anchorage, wondered if the state's too-few, underpaid auditors were overmatched going up against the oil industry's accountants, who may be claiming too many deductions.

"It's almost a catch-me-if-you-can thing," she said.

During the debate, a number of legislators, including leaders in the House and Senate, say they're skeptical the tax needs to be rewritten at all.

Rep. Jay Ramras, R-Fairbanks, said he feared raising taxes on the oil industry would cripple the state's economy.

He said he would stand in the way of any attempt to hurt the oil industry "like Tiananmen Square man."

In an emotional exchange during the hearing, Ramras criticized Palin for not appearing before the Legislature to support her bill.

"She's the governor. She's running the state," Galvin said. "She's got other responsibilities."

Ramras himself may have made a bigger change than Palin's switch to a net tax.

Last year, in announcing his support of PPT, Ramras said that if it didn't do what was promised, he'd be back to redo it "if this thing is broke, if doesn't make the right amount of money."

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



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