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Compass: Goldsmith's analysis argues against oil tax repeal

Sen. Patrick Moynihan coined a memorable retort in a Senate debate when he said, "Everyone is entitled to his own opinion but not to his own facts." Thanks to the economic research and analysis by Dr. Scott Goldsmith, professor emeritus of economics at University of Alaska Anchorage, we can now look at real facts in the debate of whether Alaskans should support or reject the oil tax reform passed in 2013.

I join many Alaskans who express profound concern that the continuing reduction of oil at 6 percent a year is a pending economic disaster for Alaska. Oil tax revenues provide about 90 percent of our state's unrestricted general fund, which pays for education, public safety, health and human services, transportation and other essential services.

The state has one primary tool to increase oil production -- the structure of oil taxes. In 2013, the Legislature passed Senate Bill 21. Afterward, the Department of Revenue predicted a $2 billion reduction in state oil revenues for 2014. Critics of SB 21 called it a "$2 billion giveaway." Signatures were gathered for a referendum to reject the bill and return to the previous tax structure, ACES. Alaskans will vote on Ballot Measure 1 in August.

Many Alaskans have hoped that an objective and knowledgeable third-party analysis. Goldsmith has provided that insight.

A presentation by Goldsmith last week, available at www.iser.uaa.alaska.edu, began by showing that the "$2 billion giveaway" doesn't exist. He pointed out that a substantial reduction in state revenues would have occurred regardless of which tax structure was in place because of a decline in royalties and a significant drop in the price and production of oil. Only 4 percent of the decrease could be attributed to SB 21.

Goldsmith's analysis demonstrated that in the future more tax revenues could in fact be generated under SB 21 than ACES, even if there were no increase in oil production. This depends on the trend of production costs increasing faster than oil prices continuing, which experts agree is the most likely case.

Furthermore, Goldsmith determined that state tax revenues would be greater under SB 21 than ACES with an increase in investment and oil production. His conclusion comes from a hypothetical model assuming $4 billion additional investment creating new production of 50,000 barrels per day.

All of these facts are powerful arguments that Alaska's way forward is not to go back to an oil tax regime that was leading us off the fiscal cliff.

Some argue that ACES collected massive tax revenues, and we should return to that system. It is true that the state treasury experienced a windfall during the early years of ACES. However, it is a mistake to assume current conditions would allow a return to those days. Goldsmith's analysis clearly explains that today's market conditions of rapidly increasing transportation and production costs, a steady steep decline in production, and falling oil prices have significantly changed the tax consequences of ACES.

Others question why oil companies would embrace SB 21 if there is a strong case that, under the same conditions, tax revenues under SB 21 would be greater than under ACES. Goldsmith offers a logical rationale by carefully comparing the two tax regimes. In particular, with the extreme progressivity of ACES at high oil prices, there was very little upside value to the companies to offset the investment risk they assume in order to increase production. Required monthly calculation and substantial fluctuation in tax liabilities all contributed to an unstable fiscal environment.

Since passage of SB 21 oil companies have committed to new investments of about $4 billion. Alaska's future would be served best by closely monitoring these promises and their effect on new production and tax revenues. SB 21 has been in effect for four months, and we need to give it a chance to work. There will be ample opportunity to make needed changes if the companies' commitments do not generate more production. The referendum is not about the oil companies -- it is about Alaska's economic future. Now that we have the facts, I'm voting no on Ballot Measure 1.

Tony Knowles is a Democrat who served two terms as Alaska's governor. He lives in Anchorage.



By TONY KNOWLES