But such a radical change is being met with skepticism from Berkowitz's rival in the Aug. 24 Democratic gubernatorial primary, state Sen. Hollis French, and others who question the approach and if it's smart policy to drop the ACES oil tax that takes advantage of today's high oil prices to flood billions of dollars into the state treasury.
Berkowitz, on his campaign website and in editorials he's written, has called for examining a completely new system that would "eliminate ACES entirely and replace it with a field-by-field royalty structure." Royalty is the state's share of the oil pumped out of state-owned ground -- most North Slope oil fields are on state land. Berkowitz proposes the creation of a commission to negotiate with the oil companies over what the state share would be on each field.
The negotiated royalty rate would take into account the economics of each individual field, according to Berkowitz, offering more flexibility.
"What I've offered is a proposal that's better than what we've got because we're faced with a situation where there's been significant job loss on the Slope, significant production declines and we can't keep doing what we've been doing," said Berkowitz, who was the state House minority leader before the current oil tax system was put in place.
French, Berkowitz's opponent in the Democratic primary, was one of the legislators who was most influential during the passage of the current oil tax, which Berkowitz wants to replace. The tax is known as Alaska's Clear and Equitable Share, or ACES. French said it was a blistering battle in 2007 to get the Legislature to pass the tax and that it's finally giving Alaska its fair share for the oil it owns while also offering tax credits to explorers. The state will "give something up and wind up with less" if it messes with oil taxes now, he said.
Matt Berman, an oil economist at the University of Alaska Anchorage's Institute of Social and Economic Research, said there are problems with switching to the kind of plan Berkowitz proposes, with field-by-field negotiations.
"The basic problem with negotiating royalty rates is that the (oil company) knows more about the economics of the field than the government and is also the one that makes the decision about whether to produce the field and how much to invest in production. ...This difference in information gives the producer an inherent advantages in the negotiations," Berman said.
NEGOTIATING WITH OIL
Berkowitz responded that the state can compel information from the oil companies. The negotiations, he said, would be conducted by an independent commission he compared to the Alaska Permanent Fund board and the state boards of fish and game.
Berkowitz said his time in the House convinced him an expert commission is needed, operating independently from often uninformed politicians. He served during the 2006 debate over the previous oil tax, which was tainted by bribery and other corruption. He said it gave him "a healthy skepticism of the Legislature and the governor's ability to come to reasoned decisions on complex issues like oil taxes."
Bob Poe, who dropped out of the Democratic primary for governor last month and is watching from the sidelines, said last week he doesn't think the Berkowitz proposal is practical.
"Somehow we're going to have this super bureaucrat who is immune from all the political push and pull that goes on in the world and they're going to be able to negotiate these really sensible royalty deals for each field. And to do this you have to take all our past tax policy and just throw it out the window," Poe said.
Berkowitz responded state officials negotiate with oil companies all the time.
Berkowitz's plan has a fan in Brad Keithley, who co-heads the oil and gas practice at law firm Perkins Coie, which has offices across the country and in China. Keithley, who works out of the firm's Anchorage office, said Berkowitz' plan is creative and could provide much needed help to oil investment.
"One of the key aspects is that the royalty is established by contract. It's not subject to political whims and fancies and is something that is negotiated with the company and agreed with the company," Keithley said. "And I think would provide a reliable, predictable mechanism for the oil companies on which to base investment decisions."
Keithley said the state has changed tax systems three times in the past five years and oil industry investors are uncertain about what's going to come next. He said the details of the Berkowitz plan need to be fleshed out. But he said it shows promise and injects a new, fresh concept into Alaska's debate over oil taxes.
MONEY FOR PERMANENT FUND
Berkowitz said he sees the new system starting on new fields. Existing leases would remain under the current ACES oil tax unless the companies had a compelling argument. He called ACES the "default" if terms cannot be negotiated.
He said his plan would impose spending discipline on the state because it would reroute money now going into the state treasury into the principal of the Alaska Permanent Fund, where it's off limits for spending. The state Constitution requires 25 percent of royalties go into the Permanent Fund, and state law says half the royalties from new fields go there. He argued that would press the state to come up with a long-term financial plan, getting away from a pattern of spending when the state has money and panicking when oil prices and revenue drop.
Berkowitz listed former Alaska Permanent Fund executive director Bob Storer as a supporter of his proposal. Storer could not be reached for comment on the proposal.
Richard Fineberg, an oil analyst based outside Fairbanks, said Berkowitz deserves credit for thinking comprehensively about Alaska's fiscal system and proposing a commission to address it. But Fineberg said he's troubled by Berkowitz's plan.
Fineberg said that such a radical change in Alaska's tax system would create instability that is not good for the state or the industry. "I believe it would be a huge signal to the industry that either we're your pawn, are going to roll over and play dead, or we are delivering the instability that you fear," he said.
Berkowitz said he's open to critiques on the details but believes the basic principles of switching to a royalty system is more oil production, greater state financial stability and protection of the Permanent Fund. ACES won't be in place forever, he said, and the state needs to think about what it can do better for the future.
"I'm not vain enough to think I have the definitive answers to everything, but I am optimistic enough to know if you put forward good ideas, new ideas, it can stimulate the right kind of conversation," Berkowitz said.
Find Sean Cockerham online at adn.com/contact/scockerham or call him at 257-4344.
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