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Sense and nonsense in Goldsmith oil tax analysis

Dermot Cole
OPINION: Veteran Alaska economist Scott Goldsmith is right that Alaska isn't facing revenue shortfalls at today's oil prices and production levels because of the new oil tax regime, but his analysis highlights how badly flawed the debate was before lawmakers passed those reforms.

FAIRBANKS -- Veteran Alaska economist Scott Goldsmith says the $2 billion decline in state revenue this year has almost nothing to do with the decision by the Parnell administration and the Legislature a year ago to cut oil taxes.

There is no $2 billion giveaway, Goldsmith told an Anchorage audience last week, using a slide show headlined “SB 21: Sense and Nonsense.”

I agree with him that there is no $2 billion giveaway at today’s prices and production levels.

But there was sense and nonsense in what Goldsmith had to say, too.

If oil prices spike to $150, even for a few months, because someone wreaks havoc with the international world order, the state will be giving and giving until it hurts.

The old ACES tax law, the so-called Alaska’s Clear and Equitable Share, was essentially an insurance policy that at  high oil prices -- $120 to $150 a barrel and up -- the state would collect wads of cash. Oil companies play to win, however, so they are spending big money this year to keep ACES in the hole.

The proponents of repeal have no money, but they hope the simplistic “$2 billion giveaway” slogan will strike a chord with the voters.

Goldsmith and others, including former Gov. Tony Knowles, stress that the “facts” show the oil tax cut was not really a tax cut or a giveaway, so it would be foolish to vote to repeal the law.

Knowles says Goldsmith has solved the great puzzle and “now that we have the facts, I’m voting no on ballot measure 1.”

I'm a big fan of facts. It’s just that there are many more that need to be examined before the primary election vote in August.

For instance, Goldsmith told his audience that the experience in Cook Inlet provides evidence that if the state offers incentives, oil companies will respond with more production. There has been a “dramatic uptick” in Cook Inlet because of lower taxes, he said, and properly structured incentives on the North Slope could also work wonders.

What he did not say is that the tax rate on oil in Cook Inlet is zero, which hardly qualifies as the template for the economic salvation of Alaska.

Failures of analysis

Speaking of facts, I would like to focus, just for a moment, on the most troubling aspect of the Goldsmith/Knowles sales pitch -- the failure to acknowledge the research and analytical failures that preceded passage of the tax cut.

A year ago, when the Legislature approved the tax cut, proponents and consultants said the oil companies would collect more and the state would collect less under the bill. The assumptions used in those reports about oil production costs, oil prices and oil production levels pointed to a decline ranging from hundreds of millions to billions in the years ahead.

“Since the state of Alaska will be forgoing significant revenue in the short run in the hope of increased production, the question of the timeframe in which revenues from increased production might materialize is particularly important,” is how consultant Janak Mayer put it on March 17, 2013. That statement, or some version of it, was recited more often than the Pledge of Allegiance.

What the state officials and consultants failed to explain was that if their assumptions were wrong, the forecast of a revenue decline compared to ACES would be wrong.

As Goldsmith noted in his slide show, the “revision of market assumptions” since last spring meant a drop in revenue under either the old law or the new one. Those market revisions consist of new assumptions since last year about oil price, production and cost and added up to an immediate decline of $1.7 billion under either tax regime.

I’m not complaining that the state and its consultants failed to predict the future. I’m objecting to a process that did not include a range of possible future scenarios, including one showing that either approach would mean a $2 billion drop in state revenue.

I suspect there was a political calculation at work in the presentations made to lawmakers.

Incomplete assumptions, duck soup debate

Had the state and its the consultants offered one possible scenario that said taxes under ACES or SB 21 could be about the same in 2014, the political debate would have been far more complicated.

It would have been harder to get the tax cut approved by the Legislature as opponents could have argued -- rightly so, it turned out -- that the existing ACES tax structure was not as bad for the industry as advertised.

Instead, the proponents of the tax cut remained prophets of doom and gloom regarding all things ACES and the future economy of Alaska.

Ever since Gov. Sean Parnell announced in 2010 that he wanted to “tweak” oil taxes, the debate has been fully of slippery statistics, worthy of anything George Orwell’s Ministry of Truth could have created.

The oil tax campaign has already been cast as something that it is not -- a battle of extremes founded on long-term forecasts. Just remember that if the forecasts from a year ago have already been proven wrong, why should any faith be placed in statements about 2020.

Where is Carnac the Magnificent when you need him?

One important fact that overshadows everything -- Alaska’s economy faces a major challenge in the years ahead, with deficit spending that shows no sign of stopping. "Market revisions" are more likely than miracle cures.

The views expressed here are the writer's own and are not necessarily endorsed by Alaska Dispatch, which welcomes a broad range of viewpoints. To submit a piece for consideration, e-mail commentary(at)alaskadispatch.com.