Politics

Assessing Alaska Gov. Parnell's hopes for oil-tax 'do-over'

JUNEAU -- Alaska Gov. Sean Parnell is proposing billions of dollars in tax cuts for the state's biggest oil companies, but the adjustments he's called for to the oil tax law involve more radical changes than just the amount of revenue lost to the state.

The 2007 Alaska's Clear and Equitable Share Act, known as ACES and championed by then-Gov. Sarah Palin, involved a high-risk bet by the state that oil prices wouldn't fall, and a similar but more cautious bet by the oil companies fearing that prices would fall. For Alaska, which depends on oil taxes, royalties and fees to fund much of state government, ACES was an attempt to ensure the state got fairly compensated for oil produced on its lands.

The 2007 debate was over what was called a "floor," a minimum amount of tax that would guarantee revenue to the state even at lower oil prices. The Alaska Legislature removed the floor that was in the original version of ACES and replaced it with a higher tax rate at higher prices, an element known as "progressivity." Though Palin had originally proposed ACES with a floor, she signed the legislation without a floor, but with higher progressivity.

That swap, sought by the oil companies, would end up costing them dearly when oil prices rose to unforeseen levels -- and then stayed high for years. That's helped the state sock away $16 billion in savings accounts, in addition to the Alaska Permanent Fund, currently valued at about $45.2 billion.

Now, Parnell and allies in the Legislature are proposing to rewrite the state's oil tax, in effect giving the companies a "do over."

The ACES law needs re-writing, in part, because it leaves the state at risk if oil prices go down, says Bryan Butcher, commissioner of the Department of Revenue.

"Currently we take a very large bite of the apple at high prices. However at low prices, where we would need the revenue very badly, we take almost nothing," Butcher says.

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That's the way ACES was intended, when it was drafted, according to testimony at the time. In 2007 oil industry executives said that any version of the various tax "floors" that were being discussed would hurt project economics, and make them less likely to make new investments in the state.

"The intention with the floor was to provide fallback for the state in a low price environment; however, the floor has the potential to hurt investment," Kevin Mitchell, ConocoPhillips Alaska vice-president for finance and administration at the time, told the Senate Finance committee in 2007.

The state's second-biggest oil producer, BP Alaska, echoed those comments. When BP is evaluating investments in new Alaska projects, it might hope for higher prices but would have to make sure that those projects would still be profitable even if prices fell, said Clare Fitzpatrick, BP-Alaska's commercial vice-president.

"There would need to be a default assumption that the floor would kick in," Fitzpatrick told the Senators in 2007, according to meeting minutes.

That could make some projects not commercially viable, the executives said.

Pressed on the balance between the state taxing more at higher prices, versus protecting itself at lower prices, those and other executives criticized progressivity, but said what really was needed to ensure continued investment in Alaska's oil patch was elimination of the floor. That change was made at the request of the industry to make the bill more palatable, according to Sens. Bert Stedman, R-Sitka, and Lyman Hoffman, D-Bethel, though neither wound up supporting ACES.

Supporting that was a tough call, recalls Sen. Hollis French, D-Anchorage, a frequent target of oil industry criticism. "We made a strategic decision," French says in retrospect. "OK, we'll give up the floor, but we'll make sure we share on the upside. As I recall, the industry was pretty happy about that."

When Parnell rolled out Senate Bill 21, his oil tax proposal this year, he told reporters it left Alaska better protected at low prices. "It's a balancing act," he said. "It's taking less at the high end and taking more at the low end."

Parnell's bill has since been modified in the Senate Resources Committee, but still contains the combination of an increase in base tax rate and the elimination of high tax at high prices.

The Revenue Department's analysis for the impact of those changes shows that in the bill's first full year of operation, fiscal 2015, eliminating progressivity would cost the state $1.5 billion in lost revenue, while balancing that with a newly increased 35 percent base tax would bring in an additional $1 billion. Other changes would impact the overall state revenue.

While oil industry representatives have praised the elimination of progressivity, they've also criticized the new base tax floor as hurting the investment decision making process.

The Alaska Oil and Gas Association's Kara Moriarty says that increasing the base tax rate from the current 25 percent to 35 percent presents an "additional burden to the worst-case scenarios when oil prices are low or project costs are high" when companies are deciding to invest. That goes against the governor's principle that changes to the ACES tax should be aimed at increasing new production, she says.

"There is not any reasonable argument that suggests increasing the base tax rate would encourage new production," Moriarty says.

ConocoPhillips agreed. Bob Heinrich, current vice-president for finance and administration, praised the elimination of progressivity but ripped the 35 percent base tax rate in the bill touted as a tax reduction.

"It also represents a tax increase at lower prices," he said.

Senate Bill 21 is currently in the Senate Finance Committee, with debate on the bill scheduled to resume this week.

Contact Pat Forgey at pat(at)alaskadispatch.com

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