With billions in oil-tax revenue on the line, senators debate effects on state

Lisa Demer

JUNEAU -- New projections that show the latest version of a major oil tax overhaul could cost the state more than $9 billion over the next six years sparked sharp divisions Wednesday on a key Senate panel over whether that will be harmful.

A prominent Senate Democrat said a slide in oil revenue would require the Legislature to dip deeply into savings. But a Republican senator argued that the state spends too much as it is and that's the real problem.

Critics of oil tax cuts, including some watchdogs and labor unions, worry that plummeting oil revenue would give conservatives in the Legislature all they need to choke off state spending.

With this year's legislative session two-thirds over, the Senate Finance Committee on Wednesday got its first look at the projected financial impacts of its version of Senate Bill 21, Gov. Sean Parnell's oil tax measure.

The bill would significantly lower oil taxes in the hopes of spurring new investment and reversing a decline in production. The financial impact projections are in a draft analysis from Parnell's Department of Revenue.

Sen. Lyman Hoffman of Bethel, the lone member of the Democratic minority caucus on the Finance Committee, said the cost to the treasury would be huge.

"These are truly staggering numbers to be looking at," Hoffman said.

Even with no changes in the tax structure, to balance this year's budget the state may have to tap savings accounts to the tune of $400 million, Hoffman said.

If the new tax measure became law, eliminating an element in current taxes that sets progressively higher tax rates at higher oil prices, the projected hit next budget year would range from $1 billion to $1.3 billion, meaning a deficit of perhaps $1.6 billion.

"To move this much cash across the table is going to have in my view detrimental effects to the state's operating budget," Hoffman said.

Oil revenues make up 90 percent of the state's general fund and pay for everything from teachers to troopers to roads.

By the 2019 budget year, the cost would likely be between $1.4 billion and $1.8 billion, without accounting for any new oil production.

Sen. Kevin Meyer, R-Anchorage and the co-chairman of the Finance Committee, said he understood the concerns but oil production is declining and the state needs to become more competitive with other oil-producing regions.

Sen. Donny Olson, a Democrat from Golovin, near Nome, who joined the Republican-led caucus this session, asked Parnell administration officials how much additional oil needed to be produced to make up the lost revenue from lower taxes.

"How many barrels are we going to have to have?" Olson asked.

Mike Pawlowski, the revenue department's oil-tax advisor, said the administration and consultants were working on that analysis but so far have evaluated three different scenarios.

Under the most optimistic scenario, an operator in an existing oil field would build a new drill pad and add 15,000 new barrels a day in 2014, expanding that to 90,000 new barrels by 2019. The scenario assumes that none of that would qualify for an extra tax break aimed at previously untapped pools of oil and concludes that by 2018, the state would be collecting slightly more oil tax revenue than it does under the current tax regime.

That's just a hypothetical example, but the loss to the treasury would be real, Hoffman said.

The other committee co-chairman, Republican Sen. Pete Kelly of Fairbanks, said the budget problem arises because the state spends too much, not because of diminished oil production.

"We are talking about ... keeping money for government because we are worried we won't have enough to spend on government," Kelly said. "But the fact is we've spent too much."

He said a proposed operating budget this year of $5.6 billion or more "is a ridiculous amount of spending."

The Legislature needs to look at the issue differently, he argued, and not focus on protecting the state budget.

Kelly didn't address how many Alaskans now rely on state spending for jobs, through state contracts and direct employment, but said people want to be in control of their own money and be assured of jobs.

"Are we here to protect the interests of government or are we here to protect the people of Alaska?" Kelly said.

The latest version of the bill, with a 30 percent base tax on oil profits, would cost the state about the same as the version proposed by Parnell in January. It would bring in hundreds of millions less per year than the version that emerged earlier in the session from the Senate Resources Committee, which included a 35 percent profits tax. Parnell had proposed 25 percent but the Senate versions also included a $5-per-barrel tax break.

The Senate Finance Committee is continuing to take testimony on and debate the bill. It may come up on the Senate floor Saturday or even Sunday, Senate President Charlie Huggins, R-Wasilla, said in an interview Wednesday. He isn't approving any travel by senators this weekend.

It will take 11 votes for the bill to clear the full Senate.

While 13 Republicans and two Democrats are in the GOP-led majority, some from both parties are opposed or undecided. Sen. Dennis Egan of Juneau, the other Democrat in the majority, said Wednesday that he is alarmed by the projected revenue hit, and Sen. Bert Stedman, a Republican from Sitka who was the Senate's leading player on oil taxes last year, has spoken up against this year's approach.

Huggins said he was confident the oil tax bill will pass.

"Shoot, I'd be surprised if we didn't have 15 (votes)," he said. "We're good."

The House Resources Committee already has scheduled hearings on the Senate bill for next week. The Senate had a goal of passing an oil-tax bill in time to give the House 30 days to work on it.

That won't happen unless there's a special session. As of Thursday, there's a month left in the 90-day regular session.

Contact reporter Lisa Demer at ldemer@adn.com or 952-3965.

Contact Lisa Demer at LDemer@adn.com or on