Tim Bradner: Alaska's oil tax debate is volatile, long-running

Tim Bradner | Alaska Journal of Commerce

A new tax on Alaska oil and gas production went into effect on Jan. 1. The new law -- known by the shorthand SB 21 (for Senate Bill 21) -- remains highly controversial.

Opponents call it a "giveaway" to the oil industry. Supporters say it has already spurred several billions of dollars in new investment, and that will produce oil in the future that wouldn't have been produced otherwise.

As a result, a ballot proposition to repeal the tax change will come before voters in the August state primary election.

Alaskans have debated oil taxes for decades but the issue never seems to get settled. As a long-time observer of Alaska oil policy, both as a journalist and as a participant (I was an oil company lobbyist in the 1970s and early 1980s), I've watched this cycle again and again-- like watching the movie "Groundhog Day."

Why it is such a volatile and interminable issue? We're a mature, oil-producing state. We're no longer the new kid on the block, writing oil policy for the first time, so why aren't we like Texas or Louisiana, where these issues are settled?

We're different in a lot of ways, including that oil is the only significant taxpayer in Alaska. Oil provides about 95 percent of Alaska's state budget. In Texas and Louisiana, regular citizens pay taxes, too.

There are other reasons, though. In my next few columns I'll try to provide some useful historical perspective so that, as you watch the pro and con campaigns volley back and forth, you'll have that context to consider.

Fundamentally, our differences with other states are rooted in the way our petroleum fiscal systems are structured and how that affects our politics.

Alaska adopted its basic oil royalty and tax structures when we became a state. We modeled our structures on those of other states because -- as a brand new state, essentially broke and in need of investment -- we didn't want to have laws wildly different from those the oil industry worked with in other states.

The basic tool is the royalty, or the landowner share of revenues. That share is set in the lease contract between the landowner and the oil company. As a contract, the royalty rate can't be changed unless both parties agree.

As Alaska has issued new leases over the years, the standard terms have changed, mainly in the royalty to the state and commitments the companies make to perform work. The traditional royalty on state leases has been 12.5 percent, meaning one-eighth of the revenue from oil produced from that lease goes to the state. More recently, many state leases require a 16 percent, or one-sixth, royalty.

Taxes are different from royalties. Taxes are set by and can be changed by the Legislature. Over the years, we've seen many changes to our oil tax laws, some raising taxes and some lowering them.

Oil companies in Alaska pay a state tax on the oil they produce. Miners pay a similar tax on ore, as do fishermen on fish, although taxes on these different products have different names.

Production tax rates on mining and fishing are far less than on oil but the concepts are the same: a cut of the revenues from public resources go to the public.

Oil companies pay other taxes too, like a special corporate income tax and Alaska's only state property tax. But the production tax is the one that provides most of the revenue.

The crucial difference between Alaska and other states is that in the Lower 48 most oil- and gas-producing land is owned by private parties but in Alaska most of it is owned by the public. In the Lower 48, the royalties go to ranchers and farmers, not the state. (There is some state-owned and university-owned oil-producing land in other states.)

Because most royalty revenues go to private landowners in the Lower 48, the states began imposing production taxes to pay for public services, some related to oil industry community impacts. When Alaska became a state, it adopted the framework of production taxes used in other states, although the rate was a minimal 1 percent.

The political effect of this, however, is that in other states thousands of private landowners share the interests of their oil company lessees in low state taxes on production.

In Alaska, instead of private landowners benefitting directly, the public benefits from oil indirectly, through state programs and our unique Permanent Fund dividend. Because our benefits from oil come through the state, primarily the state budget, our interests do not align as much with the oil companies as those of land-owning, royalty-check-cashing ranchers and farmers in other states.

A larger state capital budget? Go for it, Alaskans say. You might hear that in Texas too, but there would be more resistance because those citizens also pay for a larger budget.

Still, Alaskans do have an interest in preserving and nurturing the Golden Goose on the North Slope. The problem is how to do that well. Tax policy is complicated and there are a lot of arguments, and numbers, thrown around as to what is necessary to preserve the goose. And the Law of Unintended Consequences is always in effect.

Some Alaskans believe tax policy should be used to spread more resource wealth to the public, that the ability to periodically adjust the oil tax makes up for the inability to change the royalty (it's a contract, remember?). There are many who feel that if circumstances change, like oil going to $140 a barrel, Alaskans ought to share in those rewards through a windfall-profits tax.

That's what ACES, the tax that SB 21 replaced, really was: a windfall profits tax. However, ACES' critics say state legislators miscalculated and took too big a tax bite in the fever of the 2007 session's closing days. That will all be replayed and re-debated as the August primary nears.

My next column: How do we calculate the taxes, and how do you determine what's a fair -- to the producers and to the public?

Tim Bradner is an Anchorage-based business writer. He was a member of BP's external affairs staff in the 1970s and early 1980s.

Tim Bradner