House panel OKs 22.5% oil tax rate

Dems propose standard deduction to help prevent inflated operating costs

Posted: Sunday, November 11, 2007

The House Finance Committee voted 6-5 Saturday night to lower the state's proposed oil tax rate from 25 percent to 22.5 percent.

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This brings the rate back to its current level, approved last year under the Petroleum Profits Tax.

The full House is expected to take up the bill on the floor today.

Finance Committee Chairman Mike Chenault, R-Nikiski, made the motion to amend Gov. Sarah Palin's Alaska's Clear and Equitable Share bill Saturday evening.

Chenault said he supported the lower tax rate because it would help the economy.

"What the people of Alaska need is jobs," he said. "They don't need government programs, they need jobs."

Chenault's family-owned construction company has worked for the oil industry, he said, but he denied that was what motivated his vote.

Chenault said the state was "getting greedy, in my opinion," by seeking to get more for its oil, though he said he agreed to making more at high prices because that wouldn't hurt development.

He was joined in supporting the tax rate cut by two other Finance Committee members with oil industry ties, Rep. Kevin Meyer, R-Anchorage, and Rep. Mike Hawker, R-Anchorage. Meyer works for ConocoPhillips, as does Hawker's wife.

"The higher the tax rate, the less competitive we're going to be," he said.

Reps. Reggie Joule, D-Kotzebue; Bill Thomas Jr., R-Haines; and Richard Foster, D-Nome, joined in supporting the lower rate.

House Democrats say they think they've got a way to improve how Alaska taxes oil, modeled after how the Internal Revenue Services goes about collecting taxes from most Americans.

They'd like to give the oil companies a standard deduction, similar to what the IRS does for personal income tax payers.

"This is a way to have a net-based system, without the ability to inflate operating costs," said Harry Crawford, D-Anchorage.

The tax would still be based on the net profit, but companies would not be able to manipulate their operating costs because that part of the calculation would be determined ahead of time at a set rate.

In the House Finance Committee on Saturday evening, Crawford tried to amend Gov. Sarah Palin's Alaska's Clear and Equitable Share bill to include the standard deduction proposal.

The vote in the committee to do that failed 6-5, but Democrats said they planned to make another try to get the full House to support the measure.

"We think it's got a pretty good chance on the floor," Crawford said outside the meeting.

The motion failed mostly along party lines, but Thomas Jr. joined Democrats in supporting it. Many in the House Democratic caucus, led by Rep. Beth Kerttula, D-Juneau, went into the special session that began Oct. 18 pushing for a gross tax on the total sales of North Slope oil. They said that would be simpler and would help ensure the state wasn't cheated.

Palin, once a gross tax advocate herself, said she was persuaded by the Department of Revenue that a net tax which takes a bigger share of profits was best for the state. Under a net system, her administration said, they're able to encourage investment in the state's oil producing infrastructure by allowing those investments to be deducted from income.

Alaska last year adopted the Petroleum Profits Tax, based on oil company net profits. State officials said PPT proceeds came up well short of expectations in its first year and attributed a substantial part of that shortfall to higher-than-expected expenses reported by oil companies.

Rep. Lindsey Holmes, D-Anchorage, pushed for the Palin administration to provide an experienced auditor to meet with legislators.

Those meetings and others led House Democratic Leader Kerttula to support the idea, she said. Rep. Les Gara, D-Anchorage, an outspoken proponent of a gross tax, said he was a reluctant convert to the standard deduction proposal in the House Democratic Caucus.

"It minimizes the gaming that is possible under a net profits system," he said.

Department of Revenue Commissioner Pat Galvin said the administration did not oppose the standard deduction proposal.

The administration looked at that option closely before introducing ACES, but chose not to include it in the governor's proposal, Galvin said. He did not explain why.

One legislative consultant did oppose the bill. Dan Dickinson said the standard deduction proposal would make it more difficult to extract heavy oil. The amendment would only apply to the North Slope's two huge legacy fields of Prudhoe Bay and Kuparuk, but those fields also contain large deposits of not-yet-recovered heavy oil.

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