Exxon case sparks concerns about oil tax

State attorney says litigation possible in net tax measure

Posted: Tuesday, October 30, 2007

A top state attorney is acknowledging that a net tax on oil company profits may be more likely to lead to litigation with oil producers than a simpler gross tax, but said it is unlikely to lead to some of the decades-long oil industry litigation of the past.

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On the day the U.S. Supreme Court agreed to hear an appeal of Exxon Mobil Corp.'s $2.5 billion fine from the Exxon Valdez oil spill, legislators throughout Alaska's Capitol were considering the state's relationship with the major owner of the huge Prudhoe Bay oil field.

Rep. Bill Thomas, R-Haines, is a fisherman who represents a district that includes Cordova and other fishing communities hit hard by the 1989 tanker spill.

He said if he had to vote on an oil tax bill today he'd vote for "the max" out of anger at Exxon, but that wouldn't be fair to the state's other oil producers.

Gov. Sarah Palin called the Supreme Court's decision to extend further a case that has already lasted 20 years a "kick in Alaskans' collective gut."

Still, she said, it wouldn't persuade her to move away from her support of a net tax. She had earlier supported a gross tax, but her administration's analysis of the numbers showed that a net tax would be better for the state.

Today's decision didn't change that, she said, though she also called Exxon's recent claims that Alaska taxes were already too high "ridiculous."

Spencer Hosie, an attorney representing the state, analyzed the issue on behalf of the Department of Law.

Because of the subjective judgments made about deductions involved in a net tax, it would be more likely than a gross tax to lead to a lawsuit, Hosie said.

But Hosie predicted that any lawsuit coming from the adoption of a net tax should be manageable and not drag on for 20-plus years as the North Slope royalty litigation did.

One reason: Royalties are based on a contract in which the state is on equal legal footing as the oil producers. A tax relies on the state's sovereign authority and that gives the state a right to set schedules and force the companies to provide information, differences Hosie called "substantive and real."

A single taxpayer case might take two years, he said, compared to two decades for the Alaska North Slope royalty litigation.

"All else equal, a net tax will be more complex to administer and enforce than a gross tax," Hosie wrote.

"If the past is any guide, the taxpayers may well game costs, e.g., suddenly allocating an inappropriately large percentage of joint or common costs to their Alaska business, but the additional complexity should be manageable," he wrote.

Hosie is a partner in the San Francisco firm Hosie McArthur LLP. He was lead trial counsel for the state in State of Alaska vs. Exxon Mobil, in which a trial victory established the value of North Slope oil.

Rep. Beth Kerttula, D-Juneau, said Exxon's appeal to the Supreme Court to drop the punitive damages award sent Alaskans a message about who they were dealing with.

"We've got to keep it in mind when we make decisions about Exxon and other oil companies' behavior," she said.

Kerttula was a legislative aide for her father, former Sen. Jay Kerttula, who represented Cordova at the time of the spill.

Sen. Kim Elton, D-Juneau, said he's still convinced that the simplicity of a gross tax is the way to go, and that Monday's decision highlighted the risk of doing business with Exxon.

"I favor a gross plan because it is very transparent," Elton said.

"Do I believe that if we have a gross tax that is easy to administer? Does that change Exxon's behavior? We'll still have to watch what they do," he said.

Some powerful members of the House Republican leadership have expressed anger with Exxon. Speaker John Harris, R-Valdez, said he was "not happy" with the company.

House Rules Committee Chairman John Coghill, R-North Pole, said the state needed to recognize with whom it was dealing and draft strong legislation, but not abandon the net approach.

"It is going to make us look very definitively at the language, and make sure it is clear and defensible," he said.

Hosie recommended something similar.

"The state can discourage overly creative cost accounting by vigilantly auditing and enforcing the statute and regulations from the outset," he said.

Kerttula agreed, but was skeptical that would happen.

"The Legislature will never be willing to fund the kind of audits we need," she said.

• Contact Pat Forgey at 586-4816 or patrick.forgey@juneauempire.com.

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