$2 billion revenue shortfall sparks oil tax debate

Lisa Demer

The state on Wednesday released new budget estimates that anticipate a $2 billion drop in revenue this budget year from the year before and an even bigger hit in the year to come, mainly as a result of less money from oil taxes. The announcement immediately ignited debate over the impact of the state's controversial new oil tax regime.

The Parnell administration, in releasing its annual fall forecast, said the single biggest factor in the dramatic decline is a projected drop in oil prices. But Democrats question that and note that this year's drop is only $4 a barrel, to a projected $105.68. They say the main change since the state's last revenue forecast just eight months earlier was the passage of Senate Bill 21, which cuts taxes at high oil prices.

Whatever the cause, the drop in revenue likely will mean sizable cuts to state spending.

Gov. Sean Parnell, a Republican who pushed for the oil tax cuts to encourage more oil production, was briefed on the new fall revenue forecast earlier this week and plans to release his budget for next year on Dec. 12.

"His goal is to significantly reduce the level of state spending," his spokeswoman, Sharon Leighow, said in an email Wednesday evening.

The state expects to take in $4.9 billion this year from all of its discretionary revenue sources, mainly oil taxes, and $4.5 billion for the budget year that starts July 1, 2014. It took in $6.9 billion from those same sources in the year that ended June 30.

The new tax law -- which the administration calls the More Alaska Production Act -- takes effect Jan. 1, midway through the state budget year. It wipes out the central feature of the Palin-era tax measure passed in 2007 called Alaska's Clear and Equitable Share, which featured progressively higher taxes at higher oil prices.

The law is under intense scrutiny and already is the target of a repeal effort with a voter-backed referendum set for the August 2014 ballot. Oil revenue pays for teachers and troopers, roads and snowplows, health care and social workers. It accounts for more than 90 percent of the state's discretionary spending.

Parnell and his top revenue officials insist that the new law is working and say things would only be worse without it. They say oil companies have enthusiastically promised $10 billion over 10 years in new North Slope investment.

"Companies have already announced new projects, new rigs and new jobs since tax reform was signed into law," said Kara Moriarty, executive director of the Alaska Oil and Gas Association. "These investments are remarkable, especially when prices are forecast to go down and the referendum vote that would repeal the new tax law is looming in August 2014."

"That is a double-edged sword," said Bruce Tangeman, deputy revenue commissioner, who spent much of Wednesday briefing legislators and reporters on the new budget projections. "That is great, great news for the state that investment under the new system is going to be taking place."

But in the short term, the investment costs the state because oil companies can deduct what they spend from their taxes, he said.

Oil production is projected to continue its slide until 2022 despite the new law -- something Democrats seize on.

"Show me the production," said Rep. Chris Tuck, an Anchorage Democrat who sat in on the administration's briefings Wednesday. "Where is it, where is the production?"

On page 99 of the 112-page fall forecast, just over 508,000 barrels of oil a day are projected to be produced this year, an even lower number than forecast in the spring when the state was still under the ACES law. By 2022, the state is projecting 340,000 barrels a day. Oil production on Alaska's North Slope peaked in 1988 at 2 million barrels a day.

Tangeman said the state is sticking with a more conservative forecast system that it started earlier this year. Officials expect to see many more barrels of oil by 2022 but aren't factoring projects in at early stages when the risk is high, he said. New forecasts come out every fall and are adjusted in the spring.

"I'd love to turn it around overnight, but that's not the way it works," he said.

Because oil prices have been dropping, by next year the state would have lost even more oil revenue under the old law than the new one, said Mike Pawlowski, oil and gas program manager for the Department of Revenue.

Oil companies get to deduct expenses, and with more investment, and less oil production, that drives down the net value of every barrel, Pawlowski said. Under the ACES law, the tax rate at $105-a-barrel oil would be 32.6 percent of the value after costs, compared to 35 percent under the new law, he said. The old law would bring in $40 million to $50 million less, under the state calculations.

Democrats remain unconvinced about what's behind the drop in revenue.

"I was disappointed, but it wasn't unexpected, and that has to do with Senate Bill 21," Tuck said. The drop in production and in the price of oil "was not significant enough for the state of Alaska to lose close to $2 billion in revenue."

The fall revenue forecast is a key state document that drives state budget decisions.

"It's going to force some tough decisions," said state Rep. Bill Stoltze, R-Chugiak and co-chairman of the House Finance Committee. He said he was disappointed with projections of continued lower production.

The state has $17 billion or so in savings, which is a good cushion, Stoltze said. But that buffer can shrink rapidly, he said.

Democrats had hoped to make a big push to put more money into education next year.

"Now we've crippled ourselves from being able to do so," Tuck said.

Reach Lisa Demer at ldemer@adn.com or 257-4390.


Contact Lisa Demer at LDemer@adn.com or on