Opinion: A balanced approach is needed for oil tax rates

Opinion: A balanced approach is needed for oil tax rates

For the good of Alaska and the future of the state, please vote no on Proposition 1.

  • By Don Bullock
  • Thursday, September 24, 2020 12:22pm
  • Opinion

By Don Bullock

Proposition 1 focuses only on maximizing revenue and fails to appreciate a balanced approach to taxation that can contribute to the state over an extended period. The proposition takes the approach of “grab it while you can” and ignores an alternative of a continuous and ongoing revenue stream. Under a balanced approach, lower tax rates and credits may reduce short-term revenue, but at the same time, provide incentives for new and future production. Ongoing production even at lower tax rates provides royalties to the state that usually amount to one-eighth or more of the production volume or value. Royalties are the contractual obligation of a lessee to the state for the production of the state’s oil and gas and are different from the tax obligation.

Tax credits and deductions can be considered an investment by government to promote business activity and increased revenue. Although some past tax credits were a cost to the state with little or no state revenue benefit, oil and gas production incentives have resulted in finding new reserves and increasing petroleum production in Cook Inlet and the North Slope. Cook Inlet production has benefited users of Cook Inlet natural gas and new production from the North Slope is feeding into the pipeline.

Oil and gas are non-renewable resources. Petroleum resources differ from renewable resources in which more trees or grain can be planted, fish hatched, or hydro projects built. As a non-renewable resource, all the oil and gas that will eventually be produced in Alaska is sitting in the ground right now. After years of production, incentives are necessary to encourage exploration for previously undiscovered oil and gas deposits and for the development and support of enhanced recovery technology to make previously uneconomic reserves worthwhile to produce. We have already produced from the most easily located and economically advantageous reserves — the low-hanging fruit of the resource. We need to figure out the best ways to ensure future production and a reliable revenue stream to the State. We cannot grab it while we can and be like the farmer who has a great goose dinner and later wonders what happened to the golden eggs.

Alaska likely has the lowest point-of-production values in the United States because of the distances to markets and transportation costs. The value of the oil and gas where it is produced is the basis for determining the amount of royalty and tax revenue the state will receive. The relatively low value at the point-of-production in Alaska compared to other areas in the U.S. and the world, and the extraordinary exploration, production and development costs in the state are major disincentives to investing in Alaska. At some point, adding higher taxes makes a decision not to invest here easier to justify to shareholders.

The number of barrels that represents the lowest volume of oil that can support the operation of the Trans Alaska Pipeline System has been debated for the purposes of estimating the life of the pipeline and the tariffs necessary to support its operation. As production declines and oil available to TAPS declines, a combination of physics and economics will at some point bring an end to TAPS. The debate over the minimum throughput will eventually be resolved as production declines. At that point, the pipeline will be shut down and dismantled. If Proposition 1 passes, we may find out sooner rather than later that point at which TAPS can no longer operate.

I am not inferring that our oil and gas tax laws cannot be improved. Tax laws are just like any other law that can be amended as necessary in the best interest of the state. Studying how a tax law provides revenue to the state and whether the burden on a taxpayer is constitutionally reasonable can be helpful in refining revenue laws. However, the Legislature is the best forum for considering tax changes, particularly to a complicated tax that is the economic lifeblood of the state.

Keep the oil and gas industry and jobs in Alaska for the long term. For the good of Alaska and the future of the state, please vote no on Proposition 1.

• Don Bullock is a retired lawyer who previously worked for the State of Alaska and testified before the Alaska Legislature on oil and gas matters.Columns, My Turns and Letters to the Editor represent the view of the author, not the view of the Juneau Empire. Have something to say? Here’s how to submit a My Turn or letter.

More in Opinion

Web
Have something to say?

Here’s how to add your voice to the conversation.

After Hurricane Katrina in 2005, many Louisiana homes were rebuilt with the living space on the second story, with garage space below, to try to protect the home from future flooding. (Infrogmation of New Orleans via Wikimedia, CC BY-SA)
Misperceptions stand in way of disaster survivors wanting to rebuild safer, more sustainable homes

As Florida and the Southeast begin recovering from 2024’s destructive hurricanes, many… Continue reading

The F/V Liberty, captained by Trenton Clark, fishes the Pacific near Metlakatla on Aug. 20, 2024. (Ash Adams/The New York Times)
My Turn: Charting a course toward seafood independence for Alaska’s vulnerable food systems

As a commercial fisherman based in Sitka and the executive director of… Continue reading

People watch a broadcast of Former President Donald Trump, the Republican presidential nominee, delivering a speech at Times Square in New York, on Wednesday, Nov. 6, 2024. (Graham Dickie/The New York Times)
Opinion: The Democratic Party’s failure of imagination

Aside from not being a lifelong Republican like Peter Wehner, the sentiment… Continue reading

A steady procession of vehicles and students arrives at Juneau-Douglas High School: Yadaa.at Kalé before the start of the new school year on Thursday, Aug. 15, 2024. (Mark Sabbatini / Juneau Empire file photo)
Opinion: Let’s consider tightening cell phones restrictions in Juneau schools

A recent uptick in student fights on and off campus has Juneau… Continue reading

(Juneau Empire file photo)
Letter: Alaskans are smart, can see the advantages of RCV and open primaries

The League of Women Voters is a nonpartisan organization that neither endorses… Continue reading

(Laurie Craig / Juneau Empire file photo)
10 reasons to put country above party labels in election

Like many of you I grew up during an era when people… Continue reading

(Juneau Empire file photo)
Letters: Vote no on ballot measure 2 for the future of Alaska

The idea that ranked choice voting (RCV) is confusing is a red… Continue reading

A map shows state-by-state results of aggregate polls for U.S. presidential candidates Donald Trump (red) and Kamala Harris (blue), with states too close to call in grey, as of Oct. 29. (Wikimedia Commons map)
Opinion: The silent Republican Party betrayal

On Monday night, Donald Trump reported that two Pennsylvania counties had received… Continue reading

(Clarise Larson / Juneau Empire file photo)
My Turn: Election presents stark contrasts

This election, both at the state and federal level, presents a choice… Continue reading

(Juneau Empire file photo)
Letter: Supporting ranked choice voting is the honest choice

Some folks are really up in arms about the increased freedom afforded… Continue reading

Tongass National Forest. (U.S. Forest Service photo)
My Turn: Why I oppose privatization of the Tongass rainforest

Sen. Lisa Murkowski has been trying to privatize the Tongass for years.… Continue reading