Spending cap would simplify oil taxes

June 9, 2011 

A persistent mantra of those who argue that Alaska must lower the tax obligation of oil producers in the state is that we must show current and potential investors that "Alaska is open for business." This has usually meant a low tax rate for whatever venture is being discussed. Accordingly, the Alaska Legislature put in place in 1977-78, when Prudhoe Bay production began, a tax structure that the industry considered reasonable and not burdensome.

Changes to the tax formula in 1981, 1989 and 2006 increased the tax some, but not egregiously. But then, beginning in January 2005, oil prices soared, rising from about $40 a barrel to around $130 a barrel in July 2008. Pursuing the theory that Alaska should benefit as much as the oil companies from high oil prices, in 2007, during the Palin administration, the Legislature changed the tax structure, adopting ACES, Alaska's Clear and Equitable Share, which taxes net oil profits and extends tax credits for high-cost oil fields, effectively raising oil taxes.

The real rate of the production tax, which is dependent on the world market price, varies from 25 percent to 40 percent once credits and deductions are computed. With a brief dip in late 2008, oil prices continue to rise to more than $100 a barrel.

Given that the Department of Labor reports that the number of North Slope oil jobs increased 5 percent from last year to this, and that half of those went to non-residents, the Alaska state senate declined to undo the ACES tax structure this past session, not without some firm assurance that there would actually be something in it for Alaskans.

Looking at the long history of Alaska's economic development, it's hard to find a time when Alaska was not open for business. The federal bureaucrats who ran territorial Alaska were committed to developing any prospect that would make wealth from Alaska's natural resources, and create jobs that would bring would-be settlers north. Thus, there was very little tax burden on gold and copper mining or the canned salmon industry, and heavy subsidization of the forest products industry. Statehood brought little change to the notion that Outside investors must be helped, no matter the cost to individual Alaskans.

The concern over Alaska's economic future in the face of the fall-off of Prudhoe Bay production is appropriate. We're now at less than half of what production was at its peak, and one-quarter of per capita daily production. But there is a better way to ensure fiscal sustainability for Alaska than throwing away our fair share of the largesse generated by current high oil prices.

Scott Goldsmith of UAA's Institute for Social and Economic Research suggests we cap petroleum spending at $5 billion annually, a little less than this year's budget, and put anything over that into income-generating investments.

It's an elegant solution to the current panic, but one that would require two very courageous decisions. First, the Legislature must bite the bullet and agree to put such a cap into the annual state fiscal plan. Second, Alaskans need to get comfortable with the idea that they do not need to get richer, that the $7,200 per capita share of Alaska's oil wealth going to every citizen today is enough.

These are both huge recalculations of what it means to be an Alaskan. It means thinking not just about our own futures, difficult enough, but also the generation that comes after us. It means thinking about Alaska in the long term, and taking the responsibility for helping to nurture that Alaska. It means thinking beyond ourselves.

This change can be made to happen through courageous, committed leadership. We've had such leadership in the past: Bob Bartlett, Ernest Gruening, Bill Egan, Jay Hammond, Wally Hickel, Ted Stevens and others. Now we need it more than ever.

Leadership is not resignation, passive acceptance of the inevitable. It's not just seeing a fork in the road and taking it, to paraphrase Yogi Berra. It is the vision to see that change is needed, and the determination to lead the population in making a turn from the norm into that new vision. Right now is when we need to make that turn, and that leadership.


Steve Haycox is a professor of history at the University of Alaska Anchorage.

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