My Turn: ACES defines reality on oil tax

Currently, the state doesn't get a fair value for its oil, but the governor's plan will

Posted: Tuesday, November 06, 2007

"The first responsibility of a leader is to define reality." - Max DePree

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I rolled out Alaska's Clear and Equitable Share plan, defining reality for legislators and Alaskans: Our current oil valuation system, the Petroleum Profits Tax, is of unreliable origin, and we have devised a way to fix it.

The fix is ACES, as it was originally proposed.

Here is a reality: PPT was born out of failed gas line negotiations between the previous administration and oil companies. The administration was desperate for a gas line deal - seemingly at any cost. As a result, it compromised the original plan's 25 percent tax rate. It included giveaways for past investments. And it left the state without needed tools to protect its interests and enforce the new tax law.

PPT failed to deliver on its fiscal promises by failing to secure an equitable share of nonrenewable resources for Alaskans.

When legislators were presented with the proposed tax legislation last year, they were constantly told that PPT was the gateway to a natural gas pipeline and were warned they'd jeopardize the prize if they strayed too far from the "deal."

Nevertheless, legislators made changes to the deal they were handed, but unfortunately, were forced to make decisions based on faulty assumptions. The data they had to rely on didn't reflect the reality of North Slope costs. That data affected virtually every oil and gas decision made by the 24th state Legislature, especially the compromised tax rate.

Keep in mind that the original oil tax rate recommendation was 25 percent. That's the same rate we are recommending in ACES. It has been reviewed by numerous economists with worldwide oil and gas experience. There is no dissension - 25 percent is the right number.

ACES remedies shortfalls we've uncovered in PPT, including tools needed to protect Alaska: clearer rules, tough auditors and better information. Most importantly, with our 25 percent value component, ACES provides Alaska with an equitable share of its valuable nonrenewable resources - resources being sold for us at a premium.

The state of Alaska is the largest investor on the North Slope, having paid for 50 percent of all investments this year. Yet our share of net revenue, including royalties, property and corporate income tax, was about 40 percent. The equitable-share component in ACES narrows this gap. Sticking to a tax rate of 25 percent helps accomplish that.

In rolling out ACES, I knew lawmakers would want to "turn knobs" on my fiscal plan to reach the same goals in terms of revenue and positive investment climate created by ACES. That's part of the lawmaking process.

But if one knob is turned, for example on lowering our proposed gross floor tax, then it's imperative to turn another knob to recover an equitable share when oil prices soar. A disparate array of specialists, hired by my administration and legislators, agree that if the Legislature wants to eliminate the gross floor component, progressivity must be more aggressive.

One of the key knobs in my plan is the progressivity knob. Progressivity is the additional share we capture when oil prices and profits are high. I chose to set the progressivity knob at a relatively low level in exchange for more security when prices are low. We accomplished this through a gross tax floor at our legacy fields. If the Legislature chooses to discard that floor, then the knob on progressivity needs to be set higher to make sure we capture a more equitable share when prices are high and profits are extraordinary.

The reality is Alaska is a state very rich in natural resources. Currently, it does not receive a fair value for its resources as they're extracted and sold, at a premium, to very hungry markets. My administration and the 25th state Legislature have an opportunity to build a tax structure that is clear and equitable. That's what we get with ACES.

• Sarah Palin is the governor of Alaska.

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