Senate hands Palin oil tax victory

Industry, allies finding it increasingly difficult to oppose legislation

Posted: Friday, November 16, 2007

The Alaska Senate passed changes to Gov. Sarah Palin's oil tax bill that are likely to match the tax increases passed Sunday by the House of Representatives, leaving them close to completing work by today's midnight special session deadline.

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The oil tax bill passed 14-5 late Thursday. The increases have been bitterly opposed by the oil industry, and some of its allies in the Legislature, but called for by Palin to remove the cloud over the Petroleum Profits tax caused by a corruption investigation into some legislators and members of the industry.

"This is sweeping, this is historic, this is powerful legislation we are passing here tonight," said Sen. Hollis French, D-Anchorage.

On Thursday, a coalition of minority Republicans and Democratic members of the Senate Working Group, the majority coalition that elected Sen. Lyda Green, R-Wasilla, overrode the objections of Green and others who felt raising taxes too much would hurt the vital oil industry.

The House of Representatives on Sunday adopted a new Petroleum Profits Tax version that includes a 25 percent tax rate on profits, and a standard deduction for operating expenses that House Democrats say will limit the state's risk and reduce the risk of going to a gross tax system.

Rep. Beth Kerttula, D-Juneau, House Democratic Leader, said that standard deduction proposal was crucial in getting several members of her caucus who began the session supporting a gross tax to switch to back to Gov. Sarah Palin's plan for a net tax.

"I'm very happy to see the fundamentals of the standard deduction pass," Kerttula said.

"But I'm still concerned about the overall net profits approach," she said.

The version of the bill passed by the Senate Finance Committee on Wednesday evening didn't include the standard deduction that was in the House version, and Kerttula and her allies in the House spent the day Thursday trying to win support in the Senate for the plan.

The Senate was scheduled to begin at noon, but was later pushed to 3 p.m., 4 p.m., and then to 7 p.m. as behind-the-scenes negotiations continued on multiple amendments taken up on the floor.

If what the Senate passes is agreed to by the House of Representatives when it meets Friday, a conference committee won't be needed to sort out differences and the state will have a new oil tax law, after the governor signs it.

The 30-day special session is required by law to end at midnight Friday.

It had earlier looked like the session would end without a bill being passed, but when Palin said on Tuesday she'd immediately call another special session, progress resumed.

There were multiple attempts in the Legislature to reduce the 25 percent tax rate proposed by Palin, but by the time the bill passed through both houses, the 25 percent rate was firmly in place.

The biggest debate revolved around the standard deduction, but French persuaded the Senate to adopt it on an 11-8 vote.

The standard deduction would set the amount of operating expenses of companies that operate the huge Prudhoe Bay and Kuparuk at 2006 levels, plus a small annual increase.

French said that would give the state a least a single firm amount the state's complicated new net profits tax could count on. He said it would allow deductions for the capital expenditures needed for such things as developing capital intensive heavy oil.

"All capital costs remain viable deductions," he said.

Sen. Bert Stedman, R-Sitka, warned that heavy oil developments would have high operating expenses as well.

Representatives of ConocoPhillips Co., BP PLC, and Exxon Mobil Corp., the state's big three oil companies, used increasingly strident language to criticize the bills before the Legislature during the last public hearings held Wednesday.

"It gives us major cause for concern," said Kevin Mitchell, Alaska vice president for ConocoPhillips.

Mitchell said his company might have to reassess projects in Alaska because of the higher taxes.

"It will have an impact, it absolutely will have an impact," he said.

Mitchell didn't provide specifics on projects, but said current proposals would raise taxes on industry by $2 billion.

The Senate bills includes what's known as "progressivity," taking more for the state at high levels.

Mitchell said he understood the state's desire for getting a bigger share at high prices, but that made investments in Alaska less desirable as well.

"This steepness removes potential upside," he said.

Mitchell said ConocoPhillips was opposed to a standard deduction strategy that was included in the House bill.

"That standard deduction is a disincentive to invest in new facilities," Mitchell said.

The standard deduction passed by the House covers only operating, not capital, expenditures, but Mitchell said all new facilities include both.

BP Alaska's Claire Fitzpatrick said the higher taxes now being considered would make Alaska a less desirable place to do business.

"We will go back an look at absolutely every decision," she said.

The oil companies objected when Palin proposed her Alaska's Clear and Equitable Share act, and began an advertising campaign with their allies in Alaska's business community against it.

Company executives repeatedly angered legislators by refusing to provide information and one, Exxon Mobil, even demanded taxes be lowered.

By mid-week, those same executives were urging the Senate Finance Committee to go back to Palin's original proposal, and not the higher versions adopted so far.

Sen. Johnny Ellis, D-Anchorage, said the bill passed by the Senate would give the state and the oil industry the kind of fair tax scheme that could stand for years, and give the companies the stability they say they need.

The oil industry did get one thing they said was very important, a net tax system, having convinced Palin and many legislative proponents of a gross tax that a net tax was better for the state.

"This is the modern, progressive way to tax our resources," Ellis said.

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