New oil tax bill emerges in Senate with smaller break for new production

ldemer@adn.comMarch 12, 2013 

JUNEAU -- A new version of Alaska Gov. Sean Parnell's oil-tax bill emerged Tuesday morning in the Senate Finance Committee, and it differs from his proposal on vital particulars, including the shape of a new tax break intended to boost production.

While the official financial analysis of the new Senate Bill 21 won't be out until Wednesday, the administration says it will cost the state about the same as Parnell's measure at high oil prices, a hit to the treasury of about $1 billion a year without factoring in new production. And both Democrats and Republicans say it provides a few hundred million more in tax breaks than the prior incarnation of the bill crafted in the Senate Resources Committee.

The measure is still being worked on in the Senate, which is controlled by Republicans for the first time since 2006. Some key Republicans say they aren't yet convinced lawmakers have it right. Democrats say it's too big a giveaway without a firm link to new oil production. Whatever lawmakers decide is sure to be a campaign issue in 2014.

"I'm not there yet. The jury is still out," said Sen. Click Bishop, a first-term Republican from Fairbanks who is seen as a swing vote.

The Legislature has been struggling since 2011 with whether and how to reshape the tax system, with the goal of reversing the decline in oil production from aging North Slope fields by encouraging new industry investment.

"Obviously, if we're not going to have increased production, then we are kind of wasting our time here," Sen. Kevin Meyer, an Anchorage Republican who co-chairs the Senate Finance Committee, said during Tuesday's hearing.

Parnell has made reform of the Palin-era system known as ACES, or Alaska's Clear and Equitable Share, a top priority. He argues that its key element, higher taxes at high oil prices, discourages oil company investment in Alaska and that tax credits intended to balance the high rates are dangerously generous. Oil taxes provide 90 percent of the state's general fund revenue, paying for everything from teachers to troopers.

If tax cuts lead to higher production, the gamble will be worth it, legislators and the governor say.

"That is the tricky balance," Meyer said.

Key elements in the new Finance Committee bill include:

• A flat 30 percent tax on oil company profits, compared with 25 percent proposed by Parnell and 35 percent by the Resources Committee. Both Senate panels also temper the higher rates with a $5-per-barrel discount. That makes the new version close to Parnell's in terms of the cost.

• Elimination of the ACES provision for higher taxes at higher oil prices. The governor and the Resources Committee also proposed eliminating that feature, known as a progressive tax. Democrats say it should be kept.

• Elimination of the biggest existing tax credit, just as the prior versions proposed. But new players with operating losses that aren't yet producing oil could still get money back from the state for other credits if they invest in Alaska.

The details of those provisions are "awfully complicated and foggy," Meyer said during the hearing.

• Creation of a new tax break called a "gross revenue exclusion" intended to reward oil companies for producing oil from previously untapped sources. The Finance Committee, like the governor, proposes to exempt 20 percent of the value of new production from the profits tax, which is lower than the 30 percent proposed by the Resources Committee.

• The new version also ends the gross revenue exclusion after 10 years of production from a new well, while the earlier proposals allowed the tax break to go on forever. Sen. Anna Fairclough, R-Eagle River, warned that eventually all production would have qualified, a costly hit to the treasury. But she also says if the tax break expires too soon, producers might rush to develop a pool and not extract the maximum possible over an extended time.

Perhaps the most controversial aspect broadly extends the gross revenue exclusion to the giant North Slope fields of Prudhoe Bay and Kuparuk, what the industry and policy makers call the legacy fields. There's been disagreement over whether it applied to legacy fields in previous versions of the tax bill, though the Senate Resources version attempted to allow it.

The latest version specifies that if a producer can demonstrate the well "drains a reservoir or portion of a reservoir ... that was not contributing to production before December 31, 2012," the oil counts as new production and qualifies for the tax break.

One of the chief critics of the governor's plan and various GOP-backed revisions, Sen. Bill Wielechowski, said oil will be squeezed out of Alaska's giant fields with or without a special tax break.

"You don't need it in existing legacy fields," said Wielechowski, D-Anchorage. "That's a massive, massive tax cut for BP, Conoco and Exxon."

He said Alaska's three major oil producers already see high profits in the legacy fields and called the proposal for an expanded tax break there "the biggest, most dangerous change."

Meyer and Fairclough said they want to hear specifics from oil producers on whether the new tax break will get more production out of Prudhoe Bay -- the largest oil field in North America -- and Kuparuk.

A tax overhaul should not benefit the major oil companies over independents and new players, Bishop said.

"The majors are the anchor, absolutely. But the independents are Alaska's future," he said.

In his view, $1 billion a year is too big a tax cut but $500 million might not be enough.

Overall, the Legislature's consultants say the latest proposal would make Alaska more competitive compared to other oil-producing states and countries.

 

Contact reporter Lisa Demer at ldemer@adn.com.

 

 

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