Senate oil tax reform plan advances with concessions

Lisa Demer

JUNEAU -- A state Senate panel muscled down Friday afternoon and approved a measure to overhaul Alaska's oil taxes -- slashing the state share of oil revenue by hundreds of millions of dollars.

But the tax fight with Gov. Sean Parnell, oil producers and some Republicans is far from over.

The governor is pushing for what he and oil producers call "meaningful tax reform" to spur new production and reverse a two-decade decline in oil from the North Slope flowing through the trans-Alaska pipeline. The governor has not defined "meaningful" but he and oil producers have said the Senate approach isn't it.

Oil revenue fuels Alaska's economy, accounting for nearly all discretionary state government spending for roads, schools, health care, and public safety among other things.

Senate Bill 192 advanced Friday out of the Senate Resources Committee in a 5-2 vote. It would reduce what the state collects from oil company profits. The estimate of that reduction ranges from $200 million to more than $300 million a year. That compares with a loss to the state of more than $1 billion a year under the governor's plan, assuming that no new oil is produced.

"This bill makes a significant concession to the oil industry," Sen. Hollis French, an Anchorage Democrat who has been skeptical about the need for lowering the profits tax, said at the close of Friday's hearing. "It is a push of money across the table in the hundreds of millions of dollars. While it has not met with much industry love, for lack of a better word, I think that's a negotiating posture. I think that's what the oil industry does."

The Senate proposal contains five key elements:

• Reduces the state's current tax on oil profits, a Palin-era measure called Alaska's Clear and Equitable Share, or ACES. The Senate bill caps the tax at 60 percent of profits -- after operating and capital expenses are deducted -- compared with 75 percent under ACES. The governor had proposed a 50 percent cap, and 40 percent for new oil fields.

• Creates an incentive for new oil production. For every barrel of oil put into the pipeline above the amount from the year before, an oil producer gets a break. A producer that added 10,000 barrels of oil a day above what it put into the trans-Alaska pipeline the year before could get a $12 million to $15 million annual tax break, according to one legislative analyst.

• Sets a floor, or minimum tax, in case oil prices drop.

• Creates a new oil and gas information system to collect details on drilling, exploration, production, jobs and other facets of a big and complicated industry. After Parnell's tax proposal, House Bill 110, passed the House last year, senators balked, in part because they wanted more information.

• Separates oil and gas tax systems, a strategy known as "decoupling." A measure doing so passed the Legislature two years ago, only to be vetoed by Parnell. The governor calls "decoupling" a tax increase. As it is, when oil prices are high and gas prices low -- as they now are -- the state would take a big financial hit if large amounts of natural gas were produced, diluting the tax value of oil. That hasn't happened because without a pipeline, there's no way to market North Slope gas.

Before the afternoon vote in the committee, the coalition of Republicans and Democrats who run the Senate met privately to see if the proposal had support. It did but not from everyone.

The bill was crafted largely by Sen. Joe Paskvan, D-Fairbanks and co-chairman of the Resources Committee. He proposed a new profits tax last week then rolled into it a few of the other ideas that had been floated by committee members.

Paskvan, French and Democratic Sen. Bill Wielechowski voted for the bill as did two of the Legislature's most prominent Republicans: Senate President Gary Stevens of Kodiak, and Sen. Bert Stedman of Sitka, who co-chairs the Senate Finance Committee.

Opposing it were Sen. Tom Wagoner, R-Kenai and Resources co-chairman, and Sen. Lesil McGuire, R-Anchorage. She proposed several amendments that would have lowered oil taxes but couldn't get support from anyone other than Wagoner.

Wagoner said the path to Senate Bill 192 was unconventional, with public testimony taken before Friday's version was rolled out. The new version expanded a two-page bill to 21 pages. He said he was surprised to find that it included the separation of the oil and gas tax systems, a complex mechanism that the committee never debated, though a legislative oil consultant did cover that element when he testified.

"We have publicly patted ourselves on the back that an open and transparent process has taken place in the development of this bill, and that has not taken place," Wagoner said.

Stevens, the Senate president, disagreed that the process was unusual. But Parnell earlier in the week told reporters he had to push the committee to schedule time for public testimony at all. The people who testified in hearings earlier this week largely supported a big tax cut, like what Parnell wants.

Wagoner's main idea -- to give a tax holiday for new oil production -- didn't make it into the bill.

Under the new bill, the state's share gradually rises as oil prices increase, just not as much as under ACES.

McGuire was pushing a strategy like the governor's to carve up the profits into pieces and set different tax rates along the way, a stair-stepped approach.

But that gives too much away, other senators said.

In a related development Friday, French fired off a letter to Parnell, urging him to "desist" promoting the idea that the oil companies will invest $5 billion in Alaska with a big enough tax cut.

While representatives of both BP and Conoco Phillips, two of Alaska's big three producers, testified they envisioned spending that much combined, it would take commitment from all three producers, including Exxon Mobil.

Exxon never testified and never has made a public commitment to up its investment in Alaska.

Parnell is pushing Exxon to make such a commitment, Sharon Leighow, said Friday.

And while the governor has said he expects $5 billion in investment over three years, French noted that BP's head of finance testified it could take 10 years to reach that investment goal. By then, the state would have lost $18 billion through tax cuts under the governor's bill.

"That doesn't strike me as a good deal," French wrote.

Senate Bill 192 now goes to the Finance Committee. Stedman has said he expects to spend weeks on it.

Reach Lisa Demer at or (907) 500-7388.

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