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Economist says new tax structure isn't the main reason for drop in oil revenue

Lisa Demer

One of Alaska's leading economists says a $2 billion drop in state revenue this budget year didn't spring from the controversial oil tax law of 2013 but rather is the result of more complex forces, including higher production costs, which producers get to write off their tax bills.

Critics call the tax law, Senate Bill 21, "a giveaway." A voter-led referendum seeking to repeal it will be on the August primary ballot. Oil producers already poured millions into a campaign aiming to defeat the ballot measure.

In a talk early Thursday to an oil-friendly crowd, Scott Goldsmith, a semiretired economics professor with the Institute of Social and Economic Research at the University of Alaska Anchorage, said he determined that the new tax law only is costing the state $88 million this budget year. That reflects a half-year of the new tax.

"The so-called $2 billion giveaway under Senate Bill 21 doesn't exist," Goldsmith said at the breakfast meeting of the Resource Development Council, which drew 230 or more to the Dena'ina Center.

Organizers pushed for news coverage ahead of time and arranged for Goldsmith to talk to reporters afterward. His research was funded by a $100,000 grant to ISER from Northrim Bank, which has donated to a group trying to defeat the referendum. Northrim said Goldsmith wasn't directed to study the tax structure, but could choose his topic. Goldsmith urged people questioning the research to read his report, which is on the ISER website as well as adn.com.

Goldsmith's findings appear to inform the debate over whether the new tax system is good or bad for Alaska, but haven't settled the question for critics.

"I think he may be wrong," said Ray Metcalfe, an organizer of one of the groups supporting the ballot proposition. "It's illogical to believe that the oil companies are spending $10 million to protect their right to pay more for our resources."

So far, an oil industry-led group has raised $8.5 million to fight the referendum and a second "vote no" group has raised $260,000. The two groups backing the measure have reporting raising little.

The prior tax structure, the 2007 Palin-era Alaska's Clear and Equitable Share, or ACES, took a bigger share of the oil profits when prices were high and a smaller share at lower prices. The new system, which Gov. Sean Parnell calls the More Alaska Production Act, features a flat basic tax rate of 35 percent, higher than the ACES' starting point of 25 percent at low prices.

Under both systems, oil companies deduct their costs from the value of the oil and only pay taxes on the profit. When oil prices are high and costs are low, ACES brings in much more money than the new system. But if costs of developing fields and producing oil continue to rise faster than the price of oil, Senate Bill 21 would bring in more, Goldsmith said.

During the seven-year ACES run propelled by spikes in oil prices, the state took in $8.5 billion more than it would have under Senate Bill 21, said Sen. Bill Wielechowski, D-Anchorage, pointing to figures generated by the Department of Revenue in 2013.

Already the state is spending billions from savings to balance its budget.

"Had SB 21 been in place all those years, we'd be broke within two years," Wielechowski said.

Plus, he said, the Parnell administration predicted a drop in revenue from the new tax law ranging from $800 million to $1 billion a year, Wielechowski said.

"Those are the facts that are out there," he said.

But Bruce Tangeman, deputy revenue commissioner, said the 2013 comparison between ACES and Senate Bill 21 did not factor in new investment or new production, which was the goal of the new tax law.

It's already paying off, he said. The state had projected an 8 percent decline in production this budget year; now the drop is expected to be less than 2 percent, he said.

Production and development costs, deducted from the value of the oil for tax calculations, were greater than anticipated in part because there's more investment than predicted, Goldsmith said.

The costs now amount to about $40 a barrel, counting the fees for shipping the oil through the trans-Alaska pipeline. That's double the costs from two years earlier, according to Goldsmith's report.

ACES also allowed generous tax credits, and Senate Bill 21 gives additional tax breaks per barrel of new oil produced.

Those escalating costs have not been verified, Wielechowski noted. The state has yet to audit the spending that feeds into deductions and credits, he said. Tangeman said the state does monthly "desktop audits" but is still working on complete checks.

BP and ConocoPhillips have announced billions in new spending that they contend is a result of the new tax system. In addition, a lawsuit settlement has ExxonMobil and partners BP and ConocoPhillips spending $2 billion already and plans for another $2 billion at Point Thomson, a giant field rich with natural gas east of Prudhoe Bay, legislators were told in April.

So why are the oil companies fighting so hard to keep a tax system if it might cost them more? For one, the old tax rate fluctuated daily with the price of oil, said an opponent of ACES.

"The new tax system is a win-win because it is more predictable and durable for both the state and industry, providing a balance of protecting the state at lower oil prices while creating the right investment climate for industry to make long-term, billion dollar investments for more production," Kara Moriarty, president of the Alaska Oil & Gas Association, said in an email.

Critics say they aren't giving up their fight to kill the new law at the polls and note that the state still predicts declining production for the next decade. Tangeman said that's because of a more conservative forecasting method and that the figures will change.

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

 

PDF: Read Goldsmith's oil tax study
By LISA DEMER
ldemer@adn.com