Three conflicts become key in special session Gross vs. net

Posted: Sunday, November 18, 2007

Gross vs. net

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Juneau's top two legislators began the special session opposed to Gov. Sarah Palin's plan to tax oil companies' net profits, hoping for a tax on gross revenues as well.

"I've always been a gross tax girl," said Rep. Beth Kerttula, D-Juneau, and House Democratic leader.

Sen. Kim Elton, D-Juneau, was once a gross tax supporter as well.

Both took different tacks during the session.

Kerttula remained a believer in a gross tax but shifted to support a net tax so she could influence the debate.

The net tax that came out of the Legislature was the best that could be obtained, she said, and it includes provisions such as a standard deduction on some operating expenses that will reduce the state's risk.

Elton, a member of the powerful Senate Finance Committee, said he came to believe a net tax was actually the best way to go.

"It's difficult to change your mind," he said. "I changed my mind."

Sen. Johnny Ellis, another prominent gross tax supporter, did the same thing.

"I have evolved in my thinking," he said, though he said an online poll shows 74 percent of his constituents still support a gross tax.

A net profits tax automatically reduces taxes on the industry at low prices, a self-adjusting mechanism Ellis called "elegant in its design."

Elton and Ellis weren't the only Alaskans to change. Palin endorsed a gross tax during her campaign last year, but when she introduced her bill it was based on the structure of former Gov. Frank Murkowski's net profits method.

Among those who were not persuaded, but also didn't adopt Kerttula's strategy was Rep. Harry Crawford, D-Anchorage.

"I think a net profits tax is just a huge mistake," he said.

Crawford voted against the bill, the only member of Kerttula's caucus to do so.

Fight on the floor

When Palin introduced her bill, she included a safety mechanism, a small minimum gross tax called a "floor" that would only kick in at very low oil prices.

That would mean the state would get at least some income, even at very low prices.

The Legislature eliminated the floor from Palin's bill, however.

The oil industry had opposed the floor, because it made some projects more risky if prices fell. With the floor in, they might not be done at all to minimize risk.

"The Legislature is listening to industry, and has taken that off the table," said Sen. Lyman Hoffman, D-Bethel.

What convinced the Legislature to remove the floor was a desire to instead get more revenue for the state at higher prices.

Department of Revenue Commissioner Pat Galvin told the House Finance Committee that was an acceptable trade-off.

"We believe you have to choose one or the other, from our perspective," he said.

"Either include the floor in order to protect the state at the low end, or increase progressivity ... and save the difference to protect the state at those low prices," he said.

Palin said Friday that the inclusion of more progressivity plus the standard deduction was a fair trade for the gross floor.

Tools of the trade

Alaska last year adopted a tax on oil company net profits, without knowing much about what those profits were and how much the tax would raise.

This year Galvin said they know more. Palin's bill included new tools to provide that information to the state, and the ability to make public more information about the oil business and the state's oil fields.

At the same time, Galvin said they need additional auditors and authority to make the tax work.

"Give me the tools I need to implement this tax," he said.

The industry balked at some of those changes, especially Exxon Mobil Corp. Securities and Exchange Commission rules require the state's other to big oil producers, ConocoPhillips and BP p.l.c., to release some specific information about their Alaska operations.

Those rules don't cover Exxon, and the company zealously guards what it sees as its business secrets.

"This is obviously very sensitive to Exxon Mobil," said Dan Seckers, Alaska tax counsel for the company.

He called the demands for information "almost like a witch hunt."

Seckers said it would hurt the business climate in the state.

"Is this really the position the state wants to have?" he asked.

Among the changes in the law are requirements that companies that get valuable tax credits to encourage exploration, tell the state about what they find.

"We now have the ability to gather data and understand our oil patch," said Rep. David Guttenberg, D-Fairbanks.

"That information is wealth all by itself," he said.

• Contact Pat Forgey at 523-2250 or patrick.forgey@juneauempire.com.



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