MyTurn: Approving gas initiative sends the right message

Posted: Sunday, November 05, 2006

There's a gas reserves tax initiative on the November ballot. If you think Alaska should continue policies that allowed three big oil companies to lock up most of the North Slope's gas resource for 40 years, then heed the urgings of Alaska's political establishment. Vote no.

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Alaska needs no more of these failed policies, but I'm voting yes for other reasons. These companies paid us money for rights to this gas, but the leases involved a carrot and a stick. The carrot was that they got to keep most of the gas they could produce. The stick was that after 10 years, if they hadn't produced any gas, they lost the lease. In the intervening 40 years, the stick part got lost in the political shuffle.

In 1964, if you'd told Phil Holdsworth, Alaska's first commissioner of Natural Resources, that these companies would still have these leases in 2006 without ever having developed the gas, he'd have said you were crazy. Ditto other officials of that era, including politicians such as Bill Egan, John Butrovich and Wally Hickel.

What happened is the process got corrupted. Not in the old-fashioned sense of bribes (though there may have been more of those than we thought). I mean by campaign contributions, donations to nonprofits, and slick "public communications" campaigns that allowed the deal we struck in the 1960s to be changed, little by little, in the companies' favor. I'm voting yes on the initiative because it's the one tool voters have that might put these deals from the 1960s back on track.

Sponsors of the initiative have virtually no money to make their case, but that's not a huge disadvantage. The sponsors' biggest problem is that Alaska law allows the producers to keep their oily fingerprints off money they give to organizations and people that agree to campaign against the initiative. Through the use of these front organizations the industry has gotten traction with two arguments.

The first is that the initiative will discourage exploration. The reserves tax only applies -- and would only ever apply - to the 554 square miles in the Prudhoe Bay and Point Thompson units. So right off the bat, the initiative has no effect on exploration in the other 99.9 percent of Alaska.

As for exploration within the units, a tax on the value of a known natural resource always increases the incentive to develop that resource. This is not a new idea. Adam Smith, the founding father of economics, grasped the essence of it in the 18th century, and economist Henry George developed it in the 19th. Tax capital and labor too heavily and they flee. Land and already-discovered natural resources are different. They can't leave. A rational plan to encourage economic development will tax on the value of such God-given resources. Add value by production, or lose the resource to someone else who hopefully will.

The companies' front organizations have also marketed the idea that the initiative will tie the state up in litigation, blocking efforts to move forward with a gas pipeline.

A reserves tax is a big stick. It spurs development of warehoused gas as soon as the gas is economical to develop. The corporate interest is in holding off development until it maximizes profits. That can be a long, long time.

If the initiative passes, the companies will file lawsuits. It's an intimidation tactic they've used effectively. In 1973, when they sued to block the state's attempts to regulate the trans-Alaska oil pipeline, and again in 1978, when they challenged a separate accounting income tax.

In neither case did the companies win in court. The 1978 lawsuit is instructive. Though it was completely without legal merit (it lost in every venue and was appealed all the way to the U.S. Supreme Court), the companies won in the political arena. The uncertainty created by the legal challenge - together with generous campaign contributions - persuaded legislators to capitulate. I can't promise that won't happen again.

The initiative is no silver bullet. The Legislature can amend it as soon as it becomes law and repeal it after two years. You can bet the oil companies will have ideas along those lines. With the three leading gubernatorial candidates opposing the initiative, we can hardly expect the new administration to vigorously enforce its provisions. But passing the initiative will send the right message. At this point, I'll count that a victory.

• Gregg Erickson is a Juneau economic consultant and editor of the Alaska Budget Report, a newsletter covering the state budget and economy.

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