Gov. Sean Parnell is asking the Legislature to change Alaska's oil tax laws so the companies won't have to pay as much in taxes if they spend money to drill. It's an incentive that could cost the state treasury hundreds of millions of dollars.

Parnell said Thursday he doesn't want the tax rate lowered, but does want tax credits for investments. His announcement comes as the oil companies and many Republican state legislators maintain Alaska's oil taxes are too high and are driving away investment. This will be a battlefront in the legislative session which begins next week and in this year's governor's race, with candidates running on opposite sides of the oil tax issue.

Parnell said a new Department of Revenue study found the oil-tax system generally works well and that oil companies are increasing investment and jobs in the state. But he said there are incentives the state can give to create more economic activity.

"The numbers speak for themselves. Investment has been up in the industry. But frankly it could be better, that's why we are offering incentives and credits," Parnell said.

The Legislature raised oil taxes in 2007 at the prodding of then-Gov. Sarah Palin and created a new system to tax oil company profits that's known as Alaska's Clear and Equitable Share, or ACES. Parnell, who was lieutenant governor at the time, supported ACES and said Thursday all he wants are "refinements" to it.

Parnell's announcement drew fire from both sides. Legislators who like the state's oil tax said they've seen no evidence it needs to be changed and are worried Parnell might be offering to give the oil companies a tax benefit for something they would do anyway. Those who think the tax is too high said Parnell isn't going nearly far enough to put the brakes on Alaska's decline in oil production.

"Parnell's proposal is a good start and addresses a few important, but lesser issues. He neglects to consider the elephant in the middle of the room, that is the progressivity portion of the production tax that makes Alaska's taxes the highest in America and some of the highest in the world," said Anchorage Republican Rep. Mike Hawker, a leading proponent of overhauling the oil tax system.

The "progressivity" charge increases the tax rate by an additional 0.4 percentage points per dollar that oil prices go over $56 a barrel -- that adds up quick as prices are currently over $80 a barrel.

GIVEAWAY OR NEEDED CHANGE?

Parnell said the companies haven't shown him they'd hire more Alaskans if the state reduces that charge, which is meant to take a bigger share from the companies as their profits rise. He said the credits he's proposing are directly tied to investment in Alaska. "I'm not going to let them take that money to Nigeria," he said.

Hawker said the state's own projections show increasing pessimism about future oil production in Alaska. The state needs to be more competitive in the world market, he said.

The Revenue Department study released Thursday said oil company capital spending on the North Slope has increased since the higher taxes were imposed and at $2.2 billion stands at the highest level in Alaska's history. At least some of the increase is due to new development activities, the study said, pointing to Eni's Nikaitchuq field and Pioneer Natural Resource Co.'s Oooguruk field.

Anchorage Democratic Sen. Hollis French said he's seen no justification for Parnell's proposal to give the companies more tax benefits. French is running for governor against Parnell and any change to oil taxes is likely to have to go through the Senate Judiciary Committee he chairs.

"I would only modify them in the face of incontrovertible data that shows a need for change. Maybe they've convinced the governor but they certainly haven't convinced me," he said.

Attorney Bill Walker, who is running for governor against Parnell in the Republican primary, said the proposal looks like a "hasty response to political pressure" that offers concessions to the oil companies with no guaranteed benefit. But Ralph Samuels, a former legislator also running against Parnell in the primary, said he's glad to see a "change of heart" by the governor and that Parnell has acknowledged the need for a change.

OIL COMPANIES CAUTIOUS

BP Alaska spokesman Steve Rinehart said the oil tax is hurting investment and he's encouraged to see Parnell recognizes change is required. BP has said it will need to reduce capital spending by 15 percent this year, since Alaska has become more of a "margin play" with less potential reward than elsewhere in the world. At $850 million, the company's Alaska capital budget is smaller than in 2008 and 2009 but larger than the 2007 budget, before the tax change occurred.

Brian Wenzel, a Conoco Phillips vice president, said Parnell's proposal would improve Alaska's short-term investment climate and would stimulate incremental drilling and create jobs. But he said a change to the "progressivity" tax surcharge at high oil prices would be the best way to create an incentive to pursue long-term projects.

Wenzel said much of the capital spending the past several years has been on maintenance and renewal work as pipelines are replaced. "We think that as that work gets finished we're going to see dramatic declines in the level of investment if we don't find a way to create a more favorable investment climate here," he said.

THE PRICE TAG

Parnell is proposing to raise tax credits to 30 percent for all drilling and well-work expenses. The potential cost to the state treasury is estimated at $250 million to $350 a million a year.

Parnell said that's the same incentive the state gives for exploration and he wants to make sure there are enough incentives for drilling that increases production. He said the tax credits should "create hundreds of new jobs."

House Minority Leader Beth Kerttula, a Juneau Democrat, said she'll consider it but doesn't want to reward the companies for in-field drilling that they'd do anyway.

Parnell's proposed change to let companies take capital credits in the year they spend the money rather than over two years would involve an estimated one-time cost to the treasury of $250 million the year the legislation becomes effective. In another benefit to the oil industry, Parnell also isn't proposing the state renew a temporary limit on deductions at the North Slope's two biggest oil fields -- Prudhoe Bay and Kuparuk -- that expired Dec. 31, and which brought more than $150 million to the state treasury last year.