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Oil-tax cut may cost Alaska billions more than Parnell contends

Pat Forgey
Gov. Sean Parnell has said his proposed tax cut on oil production would cost Alaska $1 billion a year or less for the next six years, but the difference could amount to twice that under prices seen recently -- perhaps twice that much. Loren Holmes photo

An oil tax cut that's been sold as costing the state $1 billion a year or less for the next six years could actually amount to twice that under prices seen recently -- and even more under some projected future prices.

The Parnell Administration and legislative leaders, both aligned behind plans to cut oil industry taxes, are studiously avoiding discussions of such high prices in their selection of cost estimates to present to the public and in the selection of consultants to review the validity of those estimates.

Analysis of the little data that has been made public by Parnell's Department of Revenue shows losses to the state could actually amount to more than $12 billion over the next six years when looking at prices 10 to 20 percent higher than current projections. The administration is officially projecting revenue losses of $5 to 6 billion under Senate Bill 21.

Who needs 'em? 

Consultants who helped devise the ACES tax regime and other independent voices are seldom consulted for the re-write of that legislation now underway, and those who favor the oil tax cuts aren't being asked by legislators to testify about possible steeper losses for Alaska.

The Parnell administration, with strong support from strengthened Republican majorities in the Legislature, are blaming continued oil production declines on ACES. But they’re not putting forward any projections about the size of the production gains they say they expect if Senate Bill 21 passes.

"The facts speak for themselves, Alaskan oil production is declining at nearly 6 percent per year," Parnell said in his most recent weekly oil address, calling for passage of Senate Bill 21.

The governor expects that to change if Senate Bill 21 passes, but Parnell hasn't said how much he expects production to increase, or whether it would climb enough to make up for lost revenue. That strategy for winning passage of the tax cuts bill is coming under criticism from some who say more data is needed.

"I am surprised that the administration has not put forth more factual/statistical data to back up their proposal," said Steven Porter, a former Department of Revenue official who previously served as a consultant on ACES.

In an analysis posted on his blog, Porter said, "The governor cannot merely make projections based on the numbers he hopes will occur. He must analyze the possibility that his projections might occur. I have reviewed his projections and cannot back them up with data."

Earlier this week, another former consultant, Richard Fineberg, also came out against adopting Senate Bill 21 without more data to support its conclusions.

Still another consultant that worked on the passage of ACES, Gaffney, Cline & Associates, is under contract to the Parnell administration but has not been called to testify.

"They're muzzled," said Sen. Johnny Ellis, D-Anchorage and the Senate Democratic Leader.

The legislative committees considering the Senate Bill 21, headed by outspoken industry allies, also have not used their in-house financial experts in the Division of Legislative Finance.

"Legislative Finance should be testifying about this bill before the House Finance Committee. They should have testified before Senate Finance as well," said Sen. Bill Wielechowski, D-Anchorage, who wanted an independent analysis of the bill's projections and assumptions.

No projections from Parnell

The consultants are particularly important in the Senate Bill 21 debate  because Parnell has said his administration will not be putting forward projections to show what it might do. Instead, he said he'll rely on the state's oil producers to do that analysis.

When those companies said Senate Bill 21 would not yield the investment the state sought, Parnell said what was important was predictions by consultants with Econ One Research Inc. that the state would get the investment it wanted. While one consultant said he'd be "shocked" if it didn't work, none provide any data to support that opinion.

When the Parnell administration and other ACES critics began challenging the tax law, they said that when it was adopted in 2007, oil prices were $77 to $88 a barrel, and significantly higher prices had not been anticipated. Now that prices have reached then-unheard-of levels, the law needs changing, they contend.

In July of 2008, prices for Alaska North Slope crude hit $140 a barrel, and some credible projections, such as from the Organization for Economic Cooperation and Development, say prices could move far higher than that by 2020.

How high will oil prices go?

That $140 peak is far above prices anticipated by legislators when the originally adopted ACES. Now, Parnell's administration is now doing the same thing, presenting possible price scenarios in tight ranges, generally between $100 and $120 a barrel.

One legislator who sought projections based on higher prices was Rep. Les Gara, D-Anchorage. The Department of Revenue this week responded to his request with a series of charts showing different prices over several years.

Those charts show losses from Senate Bill 21 compared to ACES at almost $4 billion per year by 2019 at $160 barrels. The Department of Revenue data makes it clear that that analysis used different base data than it has been using for its official bill fiscal notes, and can't be compared directly.

The Parnell administration is projecting production decreases of 6 percent per year, while Gara asked for calculations based on the 3 percent decline rate some companies have spoken of publicly.

ACES was designed to reduce oil production taxes at low prices to ensure oil company projects would be profitable even at low prices, something companies then said was important to their investment decision making.

At high prices, it would allow the state to share much more of those windfall profits.

Gara said the just released data shows Senate Bill 21 would undermine that strategy, taking more at low prices and less at high prices, as well as the overall decrease.

"No one can predict future prices, but if global events send prices through the roof and we aren't getting our fair share, Alaskans will lose twice -- their energy costs will spike and the state will miss out on hundreds of millions of dollars," he said.

Contact Pat Forgey at pat(at)alaskadispatch.com