Legislature OKs oil tax hike

Bipartisan effort, with help from Juneau delegation, hands Palin an improbable victory

Posted: Sunday, November 18, 2007

Alaska will soon get a bigger share of its increasingly valuable oil resources, after new Gov. Sarah Palin won an improbable victory in the Legislature despite strong opposition from top legislative leaders and the state's most powerful industry.

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The bill backed by Palin received unexpectedly strong legislative support, passing by 2-1 or better in both houses, despite opposition from key leaders in the House of Representatives, Senate and oil industry.

The new tax is expected to bring in an additional $1.5 billion a year, and likely came about due to a combination of skyrocketing oil prices showing just how valuable Alaska's oil is, and growing evidence that passage of the Petroleum Profits Tax last year had been influenced by corruption.

Some said the change wouldn't have happened without the ongoing bribery scandal, which prompted Palin to call the special session. It so far has resulted in three former legislators involved in the Petroleum Profits Tax debate, and three former lobbyists, convicted or pleading guilty, with more investigations ongoing.

"Any student of Alaska history knows it takes extraordinary circumstances, actual crisis in the state of Alaska, for us to muster the political will to make adjustments," said Sen. Johnny Ellis, D-Anchorage.

The bill passed by the Legislature on Friday was much changed from the Alaska's Clear and Equitable Share bill introduced by Palin when the session began on Alaska Day, but Palin praised it at a victorious press conference with a bipartisan group of legislators who helped her pass it.

"It meets the principles we set out to achieve," she said.

Among those was a fair share of Alaska's oil wealth.

An increase in the base oil tax rate from 22.5 percent to 25 percent of profits, along with a progressively higher tax rate at higher prices, would combine with new restrictions on deductions to give the state a fair value for its oil, bill supporters said.

And importantly, supporters said a fair share will ensure the oil industry will get the stability that it said repeatedly was a top concern.

"I think it puts this issue to bed, rather than something that is scratched open year after year," said Rep. Mike Kelly, R-Fairbanks, a conservative Republican who carried the bill through the House.

Rep. Jay Ramras, R-Fairbanks, though, called it a "massive, massive taxation increase," and said it risked driving oil industry investment --and jobs - away from Alaska.

"This is too much," he said.

Palin on Friday said the tremendously valuable resource, combined with incentives in the bill, would keep the development going.

BP Alaska President Doug Suttles, whose company operates the nation's largest oil field at Prudhoe Bay, issued a statement criticizing the action Friday.

During testimony before numerous committees of the Legislature, BP executives hinted, but didn't actually say, that they'd cut spending in Alaska if taxes were raised.

On Friday, Suttles continued that strategy.

"We all need to be focused on developing new oil production for future generations of Alaskans, but this legislation does nothing to encourage more investment," he said.

Rep. Anna Fairclough, R-Eagle River, went a step further and made a claim the oil companies didn't make themselves.

She said the standard deduction provision that emerged late in the session as the key to passing the bill would cost existing jobs.

"If we limit deductions on the North Slope, producers will lay off people, that's my fear," she said.

A gross profits tax, such as the Petroleum Profits Tax passed under former Gov. Frank Murkowski last year and the ACES plan proposed by Palin this year, allows deductions of costs to calculate the companies' net profits.

Palin said her bill was crafted to get more for the state when prices were high and the companies could afford it, but also use credits and deductions to spur investment in new production, even at lower prices.

"The bill strikes a careful balance," she said. "It assures a fair share of our oil's value for Alaska, while encouraging producers to invest in new fields."

Late in the session, the bill appeared stalled in the Senate Finance Committee, where co-chairmen Sen. Bert Stedman, R-Sitka, and Sen. Lyman Hoffman, D-Bethel, opposed it.

With the constitutionally mandated 30-day limit to the session approaching rapidly, Palin said she'd immediately call another special session if the Legislature did not act.

She later denied that was a threat.

"I didn't threaten that we would come back, I reminded," she said.

Soon after the Senate Finance Committee acted and moved a bill to the Senate Floor. Co-chairman Stedman denied any effort at stalling, and blamed the delay on the difficulty in getting a bill drafted.

Stedman's committee, along with the corresponding committee in the House, were both heavy with allies of the oil industry.

Senate Finance Committee member Kim Elton, D-Juneau, said that on an issue as big as this one it almost didn't matter what the usually important committee did. Elton said his main goal was to get a bill to the Senate floor, where he and other allies of the governor had a majority.

"It came down to where are you going to make the fight," he said.

Despite opposition from the Legislature's top leaders, including the Senate president and co-chairmen of both Finance Committees, and lukewarm support from House Speaker John Harris, R-Valdez, the Legislature solidly backed the governor on the bill.

Harris voted for Palin's ACES bill, but it was hard to tell from the statement he issued after the legislation passed.

"The governor and her administration have crafted a bill and pushed it through the Legislature that will either tap the producers for another $1.5 billion without harm, or end up hurting our economy by driving away oil industry investment," he said.

"We will need billions of dollars of investment to keep our production up, so I am hopeful the governor has not made a serious mistake with this legislation. But we won't really know for sure for a couple of years," he said.

Freshman Sen. Bill Wielechowksi, D-Anchorage, emerged as a major player inside the Senate Working Group, the bipartisan coalition that elected Sen. Lyda Green, R-Wasilla, Senate president, but which was split on raising taxes.

He called the bill they passed fairly moderate.

"We're not going crazy here," he said.

The amount of money the tax will raise depends greatly on the price of oil. The new tax will bring more to the state at high prices, but at the recent average or even high prices, the new tax brings in less than PPT was expected to last year, he said.

Senate Republican Minority Leader Gene Therriault, R-North Pole, said oil companies complaining that ACES meant a "second" tax increase after PPT were overstating the case because Palin's ACES probably wouldn't bring in as much as the companies and the public were told the PPT would bring in.

"It's not new dollars on top of it, it's the same dollars," he said.

Juneau Rep. Beth Kerttula, leader of the House Democratic Minority, helped broker a deal with Republicans who favored a net tax, and brought most of her caucus along as supporters after the standard deduction was included.

She called ACES a risk the state needed to take to guarantee its future.

"We're Alaskans, we like to risk," she said.

The standard deduction fixes operating costs for several years at 2006 levels, plus a 3 percent annual adjustment, for the huge Prudhoe Bay and Kuparuk fields. That's intended to prevent deductions shooting up again and reduce the state's risk, she said.

In 2006, deduction amounts doubled from the previous year, a surprise Commissioner of Revenue Pat Galvin attributed to the PPT bringing in $800 million less than expected.

Sen. Lesil McGuire, R-Anchorage, supported the tax increase, but objected strongly to the standard deduction's late arrival as part of the debate.

"In the final hours this comes out as the thing that is going to make or break it," she said.

She called it a significant change that was poorly understood and inadequately debated.

Therriault, who helped Palin move the bill through the Senate despite his position in the Senate Republican Minority, said the state's tax increase would come before the oil companies paid federal taxes, and would lower those taxes significantly.

"A third of the take comes from the federal treasury," he said.

"Let's be fair when we talk about the potential impact to the industry," he said.

Rep. Les Gara, D-Anchorage, a longtime advocate of oil tax reform but an opponent of last year's PPT, said he looked to former Gov. Wally Hickel's advice about how to judge ACES.

"The Constitution says we should develop our natural resources for the maximum benefit for our people. That's how you measure any oil tax," he said.

The bill the Legislature passed "restores the state's sovereignty," he said.

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

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